At current prices, FY23 fertiliser subsidy sufficient for 6-7 mths: Experts

However, the govt may have to infuse more fertiliser subsidy if global gas prices rise.

The near 25 per cent drop in fertiliser subsidies in FY23, as laid down in the Union Budget, has opened three possibilities.

The first is that the Centre does not expect international prices to remain elevated next year as was the case this year, which would automatically bring down the burden in the months ahead.

The second is the likely hike in retail rates, which will minimise the burden, and the third and most likely scenario is that Centre injects more funds into fertiliser subsidies in the middle of the year, to keep prices down, as it has been doing for the past two financial years if global rates spike.

In FY22, the Central government had budgeted the fertiliser subsidy to be about Rs 79,530 crore, but with the time year coming to an end, it has pegged the revised subsidy at Rs 140,122 crore, a jump of 76.1 per cent.

Of all the possibilities, trade and market sources said that second or the third scenario looks most probable.

Usually in a normal year, the Centre needs to allocate about Rs 80,000 crore as subsidy for both urea and non-urea fertilisers. In FY23, though lower than the revised estimate, the Budget allocation is still 31.5 per cent more than this notional requirement. But whether this is enough to meet the full year’s requirement is a million-dollar question.

Market sources said given the current market price of all fertilisers and the future price outlook, the Budget allocation for fertilisers in FY23 should last for next 6-7 months. Thereafter, another fresh infusion might be needed if the current market conditions persist.

“The global fertiliser market is highly dynamic and lot depends on how crude oil, gas and petroleum prices move in FY23 and also how geopolitical tensions play but nonetheless, if the current market prices, the consensus is that a subsidy of Rs 105,222 crore in the Budget for fertilisers should last 6-7 months at current level of domestic consumption,” a senior industry official commented.

Price spike

Data sourced from various agencies shows that in the current financial year between April 1, 2021 and January 28, 2022, prices of urea in the international markets have gone up by as much as 143.13 per cent, from $357 per tonne to about $869 per tonne.

The prices have moderated a bit since the first week of January, before which they had climbed to even $959 per tonne (in November 2021).

In the case of imported di-ammonium phosphate (DAP), the global prices have moved up from $400 per tonne in April 2021 to $930 as of January 2022, a rise of 132.5 per cent.

Urea is the most widely consumed fertiliser in India, followed by DAP. In DAP, almost half the annual domestic consumption is produced locally, while the rest has to be imported. In the case of urea, India annually consumes around 33 million tonnes, of which almost 70 per cent is domestically produced, while the rest has to be imported.

In case of DAP, almost the entire ammonia and the phosphoric acid that goes into its making has to be imported as it isn't produced in India.

The price of ammonia in the world markets in this financial year moved up from $430 per tonne to $900 as on January 22, 2022, a rise of 109.30 per cent, while phosphoric acid during the same period has risen from $795 per tonne to $1,330 (up 67 per cent).

Because of this sharp increase in global prices of largely finished DAP and its key inputs, the Centre had first infused about Rs 15,000 crore as fertiliser subsidy in June and then topped it up with another Rs 46,000 crore in October 2021, as prices didn’t show any signs of falling.

Because of the sharp rise in global prices companies stopped importing DAP and their raw materials leading to acute shortage ahead of the key rabi sowing season.

At present, DAP is being sold in the retail markets at a rate of Rs 1,200 per 50 kg bag while the non-subsidised price should be Rs 3,200-3,300 per bag.

Going forward

The biggest question is whether the current price trend will sustain, going forward. Most experts and market watchers say that predicting global markets is highly difficult but much will depend on how crude and gas prices move in the next financial year.

In the case of urea, market watchers said at present global gas prices are very high, while the domestic pooled gas price has also moved up from $13/mmbtu to around $16.5/mmbtu now.

But, the expectation is as the major consuming countries in the world enter their summer season consumption will go down which will help in bringing down imported LNG prices and if the government intervenes then the domestic pooled gas price will also stabilise.

Imported LNG has a share of around 67 per cent in India’s total annual gas requirement, while the remaining is met through domestic pooled gas.

In the case of DAP, there is a shortage of finished products in the world market as China is not relaxing its strict export controls, while in case of finished products the prices are contingent on the price movement of natural gas and crude oil.

And, if prices of both move up sharply in the coming financial year, it will be difficult to maintain the subsidy levels or else the companies will pass on the high production cost to farmers.