Ukraine crisis: Commodity prices to impact FY23 fertiliser subsidy targets

As Russia’s invasion of Ukraine keeps global commodity markets on tenterhooks, at least one allocation in the FY23 Budget is likely to be exceeded, the government has assessed, even before 2022-23 has begun.

The FY23 fertiliser subsidy allocation of Rs 1.05 trillion is looking insufficient owing to a continuing spike in urea rates and the expectation that other key raw materials like phosphate and ammonia might further come under pressure due rising crude oil and gas prices.

“Our fertiliser subsidy will go up,” a top government official said.

The Budget Estimate for the FY23 fertiliser subsidy is almost 25 per cent less than the Revised Estimate for 2021-22.

“At the present pooled gas rate of $16/mmbtu, the subsidy requirement is projected to be close to Rs 1.50 trillion and if the rates are revised further up, there could be a greater requirement,” a second official said.

While preparing the Budget, the thinking among government officials was that there could be some moderation in rates for urea, whose prices in the global markets have softened since November 2021 by almost 40 per cent while DAP (di-ammonium phosphate) is selling at around $900 per tonne in the global markets.

Several market players said Rs 1.05 trillion in FY23 was inadequate and could last not more than seven months. But the spike in global rates of LNG, which has directly affected the Indian pooled gas rates because gas is a major raw material for urea, could jeopardise all the maths.

Trade sources said Indian pooled gas rates could go up to $18/mmbtu. Rough estimates show for every $1 increase in pooled gas rates, the subsidy requirement for urea increases by Rs 4,000-5,000 crore.

That apart, there was some talk that India was looking to meet fertiliser manufacturers from Russia for a three-year-long term contract for DAP and NPK (complex fertilisers). Those negotiations could be put on hold as long as the crisis continues.

Ukraine also supplies around 10 per cent of India’s urea requirements. That could be affected if the port closure continued for long. However, the government is confident that apart from the fertiliser subsidy, the ongoing crisis in Eastern Europe will not directly impact other assumptions for the year as much.

“We are concerned but not alarmed,” the first official quoted above said.

“The retail inflation rate may go up slightly due to oil prices. But oil has been kept out of sanctions imposed by the United States and European Union. The already contracted gas pipeline supplies are still going on,” the second official said, adding that with India’s healthy foreign exchange reserves, the oil shock could be absorbed.

The Reserve Bank of India projects the retail inflation rate to average 4.5 per cent in FY23.

On Friday, crude oil prices came down to just below $100 a barrel as the United States and European Union kept petroleum out of the sanctions imposed on Russia. A day earlier, it had breached the $100 mark for the first time in eight years.

Investors are preparing for more swings in asset prices after Western nations announced sanctions, including blocking some Russian banks from the SWIFT international payments system.

New measures announced by the United States, the UK, other European countries, and Canada include restrictions on the Russian central bank's international reserves. The moves will be implemented in the coming days.