Agri sector waits to see if new NBS will absorb special incentive on DAP

Sometime in the next few weeks, the government is likely to announce the nutrient-based subsidy (NBS) rates for FY-26 fiscal that mostly impact the non-urea fertilisers. 

What is being closely watched is the whether the special incentive of Rs 3,500 per tonne on Di-Ammonia Phosphate (DAP) that the government extended indefinitely on January 1, 2025, gets subsumed into the main NBS rates or continues to remain separate. 

The special incentive has ensured that companies continue to retail a 50 kg bag of DAP at the ongoing price of Rs 1,350, considerably lower than the actual production cost of both domestically-produced DAP and the landed price of imported DAP. 

India consumes around 10-11 million tonnes (MT) of DAP annually, of which more than half is imported. DAP is the second-most consumed fertiliser in the country after urea and is used largely during the rabi season, mostly for wheat, chana and potatoes. 

The special incentive as well as the increase in NBS rates has also meant that DAP is now the second fertiliser, the other being urea, fpr which the Centre is keeping its prices artificially low. DAP prices have remained unchanged for the past few years though, theoretically, companies are free to fix its retail price since it is not under a price control regime. 

Retail price for urea have remained unchanged for over a decade; currently, a 45 kg bag of urea costs the farmer around Rs 242 or around Rs 5,360 a tonne (since November 2012), significantly lower than the actual production cost of Rs 1,800 per bag or over Rs 35,000 per tonne. The difference is subsidised by the Central government. 

The same model is now being replicated for DAP, whose landed price is around RS 56,000 per tonne while the retail price of Rs 27,000 per tonne is more than 50 per cent cheaper. The balance is met either through NBS rates or the special incentive. 

Last year, the Centre announced a one-time special package on DAP at Rs 3,500 per tonne, valid from April 1, 2024, to December 31, 2024, with a financial implication of Rs 2,625 crore. This was over and above the nutrient-based subsidy (NBS) fixed by the government on non-urea nutrients in the Budget. 

The package was meant to cover the extra expenditure that companies incurred on importing finished DAP or its raw material, prices of which had gone up due to longer transportation routes on account of geo-political tensions. 

The special incentive was extended for a second time on January 1, 2025, this time indefinitely, with an additional outlay of Rs 3,850 crore. Had the subsidy not been extended, fertiliser companies had planned to increase DAP retail price by at least Rs 200 per bag, sources told Business Standard. 

However, despite the extension, fertiliser companies have not been able to cover the entire loss they were making in importing DAP, which also forms the benchmark for settling domestic DAP subsidies. 

As per trade sources, the landed price of DAP when the special incentive of Rs 3,500 per tonne was extended in January 1 was close to $637 per tonne, while now it is around $633 per tonne, suggesting there was hardly any softening in price. This means that even after adding the special incentive over and above the FY25 NBS rates of around Rs 22,000 per tonne, companies were making a loss of Rs 3,600 per tonne in importing DAP which might now have been slightly dropped to around Rs 2,600 per tonne. 

In other words, the new NBS rates for DAP will have to factor in not only the special incentive but also the additional price if it intends to cover the entire landed cost and not force companies to pass on a portion of the increase through hiking the retail rates. 

However, sources said that as soon as India increases NBS rates of non-urea fertilisers, prices in the global markets also tend to move up which negates the increase. 

“But, if the NBS rates are revised positively, then private companies might start importing DAP which so far has been limited to government firms whose total loss is covered by the government,” a senior industry official said. 

But several experts said that artificially keeping DAP rates low by constantly increasing the subsidy element also means that DAP has effectively become the second fertiliser in India whose prices are artificially kept low. 

This has two major impacts: First, it causes fertiliser reforms to be put on the backburner and second, it keeps fertiliser subsidies elevated (though they have dropped since 2022-23 which was an abnormal year due to the Russia-Ukraine crisis). DAP rates need to be aligned with international markets for the benefit of all.