An over 50% increase in the import cost of urea in the four years to FY13 has led to a spike in the Centre’s fertiliser subsidy bill even as the policy of fixed subsidy on phosphatic and potassic (P&K) fertilisers, implemented since April 2010, slashed the Budget outgo on the two by 25%.
The good news for managers of government finances is that the import price of urea, which accounts for more than two-thirds of the total fertiliser subsidy bill, has moderated in the last two to three years. From an average of $482 a tonne in FY12 and $413 in FY13, the price of imported urea in the April-October period has come down to $360. The rise in consumption of the fertiliser and rupee’s depreciation have offset the positive impact of the fall in price on the exchequer.
Of the total domestic consumption of urea (estimated at 31 mt in FY14), about 25% is imported. Since new urea capacities are not coming up due to an unattractive policy, the reliance on imports is on the rise.
Urea price decontrol remained on the government agenda for long but could not be implemented for lack of political consensus.
The experience with the partial decontrol of P&K fertilisers by capping subsidies (fertiliser firms did not quite abide by the ?gentlemanly agreement? with the Centre that prices won’t go up beyond 10% a year) also contributed to the delay in urea decontrol.
Prices of potash and rock phosphate are determined by global contracts and the Indian demand impacts global prices decisively.
“The average cost of imported urea till October of the current fiscal has come down to $350-360 per tonne but the currency depreciation has ensured that subsidy hasn’t come down much,” a fertiliser ministry official said.
Increased supplies from China has pressured the global urea market, resulting in a significant decline in prices.
Urea is the only fertiliser that is still under control and is sold at a government-notified price. The price of urea is highly subsidised and fixed by the government. The last major revision was on April 1, 2010, when the price was increased to R5,310 per tonne from R4,830.
In October last year, the price was marginally hiked by R50 to R5,360 a tonne. “Even if urea prices are increased to the extent of 10%, the impact on the subsidy bill will not be significant in absolute terms,” K Ravichandran, analyst at ICRA, said.
The Centre has been implementing nutrient-based subsidy (NBS) policy for P&K fertilisers since April 2010 under which it announces a fixed subsidy for 22 grades of P&K fertilisers and their maximum retail price (MRP) are freed.
As per the NBS policy, the MRP of potash and phosphate fertilisers has been left open to be fixed by manufacturers and the amount of subsidy is fixed by the government for each nutrient. For this fiscal, the Centre has earmarked around R66,000 crore as fertiliser subsidy. But it has used up around R35,000 crore to pay arrears even as the actual subsidy this fiscal is also likely to be higher than budgeted. This means it will roll over payment of substantial amounts to next fiscal.