India saves $1.8 bln on fertiliser subsidies, but no reform planned

By Manoj Kumar and Mayank Bhardwaj

NEW DELHI, (Reuters) - India could save about $1.8 billion on fertiliser subsidies this year thanks to low energy prices but Prime Minister Narendra Modi's government, two sources said, has no plans to remove price controls, a reform that would risk angering farmers.

Industry groups had hoped that the reform-minded Modi would use the opportunity presented by lower prices to free up the fertiliser market, as he did with diesel a year ago.

But stung by opposition to his reforms, including the defeat of a pro-industry land reform that opponents said was damaging for farmers, Modi is now more cautious of angering rural voters.

About two thirds of India's population live in the countryside, and the prime minister is currently campaigning in the large rural state of Bihar, where assembly elections are due in a few weeks.

"Currently, there is no plan to raise urea prices, possibly for the next few years," a senior official at the fertilizer ministry, with direct knowledge of policy issues, told Reuters.

He said falls in naphtha and gas prices would likely reduce the fertiliser subsidy bill to 600 billion rupees ($9.1 billion) this fiscal year, about 18 percent below last year.

The savings will help India towards its goal of reducing the fiscal deficit to 3.9 percent by the end of March, while simultaneously increasing spending on roads and rail in an attempt to revive the economy with a government-led stimulus.

Another official at the finance ministry said the funds saved could be used for infrastructure or social sectors, which have faced cuts this year.

Two sources said the import tax on urea, now 5 percent, could be hiked to protect domestic producers from Chinese fertiliser imports if the Chinese yuan currency were to weaken further.

"Due to the fall in international gas prices, benefits from the fall in fertiliser subsidy bill could accrue to the government this fiscal year," said finance ministry spokesman D.S. Malik. He declined to comment on the decision not to free the market.

Critics of price controls say they encourage Indian farmers to use too much urea, rather than a mix of fertilisers that would be better for productivity and soil health.

"There was a lot of expectation when Modi came to power. We are a bit disillusioned. We do not see any change as far as fertiliser policy, payment of subsidies or ease of doing business are concerned," said Satish Chander, director general of the Fertiliser Association of India, an industry group.

Farmers pay 5,360 rupees ($81) per tonne for subsidised urea, almost unchanged since 2000. Nutrients like Di-Ammonium Phosphate (DAP) and potash, which are partly subsidised, cost three to four times more.

India now produces urea at about $375 a tonne, industry experts say, meaning any change to the subsidy would be quickly felt by both farmers and fertiliser companies.

Fertiliser producers, which include Tata Chemicals and Chambal Fertilisers have long asked for prices to be freed, or that subsidies be paid directly to farmers as cash transfers.

Finance Ministry officials said a lack of land records meant it would be difficult to shift to cash transfers anytime soon.

($1 = 66.25 rupees)

(Reporting by Manoj Kumar; Editing by Frank Jack Daniel and Simon Cameron-Moore)