The Russia-Ukraine war will make the government’s effort to rein in the runaway fertiliser subsidy bill harder, as it is likely to jack up prices of imported urea, diammonium phosphate (DAP) and muriate of potash (MoP). Cost of domestic urea may also rise given the elevated global prices of natural gas (LNG), the feedstock.
The subsidy on fertiliser could be about Rs1.5 lakh crore for FY23, 50% more than the Budget estimate of Rs 1.05 lakh crore, a large part of this increase will be on account of nutrient based subsidies (NBS) on DAP and MOP.
Even though the subsidy on DAP was capped a decade ago under a policy to rein in the budgetary outgo, it was doubled to 60% of the cost in June 2021. “The subsidy on DAP may have to be increased further to 70% in 2022 if prices don’t moderate,” said Sabyasachi Majumdar, group head and senior V-P, Icra Ratings. India imports its entire annual requirement of 5 million tonne (mt) of MoP, of which 18% is from Belarus, which is being used by Russia as a staging ground for attack on Ukraine, inviting severe financial sanctions from US and its allies.
While this would complicate imports from Belarus, the import cost for India could double as MOP prices has also now doubled to $550/tonne compared to $280/tonne India had contracted for supplies till November 2021. “With imported price almost doubling to Rs 42,000/tonne ($550/tonne), the current subsidy of Rs 6,000/tonne may rise manifold as the government may not be able to pass on the rise in cost fully to farmers at this juncture,” said Majumdar.
With 10% of India’s annual urea imports coming from Ukraine likely to be disrupted, India could make up the shortfall by from new capacity generation of about 3.8 million tone as three new fertiliser plants at Gorakhpur, Barauni and Sindri in 2022.
“Raw materials of fertiliser producing companies has gone up and is likely go up further due to the Ukraine-Russia conflict. Indian companies are trying to source MoP and DAP from other countries like Morocco,Canada and China,” said Kishor Rungta,Chairman Fertilisers And Chemicals Travancore.
While DAP, which is mostly imported, is currently hovering around $929/tonne, more than double a year ago. The imported urea prices have declined by 40% since November to $600/tonne in January. But, after the war, it has again started climbing up and is hovering around $700/tonne. Higher LNG prices are seen inflating urea cost — both domestic production and imported. Natural gas accounts for 75-80% of the total cost of production of urea plants in India. The government is now planning to to encourage farmers to use 2 bags of single superphosphate (SSP) and 20 kg of urea as a substitute to reduce DAP subsidy.
“The experiment in Rajasthan has shown that farmers reported more output after applying this mixture instead of DAP. It will be promoted in other parts of the country,” a senior official said.
Annual SSP use is about 5 million tonne, which could be expanded by manifold as it is 100% produced in India, mostly in Rajasthan.
Faced with a shortage of Urea and DAP in the Rabi season of 2021-22, the government of Maharashtra has proposed establishing buffer stocks of 1.5 lakh tonne of Urea and 50,000 tonne of DAP for he coming Kharif season.
NBS accounted for 41% of total subsidy of Rs 1.28 lakh crore in FY21 and is pegged to be 45% of total subsidy outgo of about Rs1.4 lakh crore in FY22. It was estimated to go down to 38% of the Budget estimate of Rs 1.05 lakh crore in FY23.