The eight percent cut in the new domestic natural gas price to $4.66 a unit will help bring down the urea subsidy bill by Rs.930 crore, India Ratings & Research (Ind-Ra) said on Thursday.
The cut in gas prices from $5.05 per million British thermal unit to $4.66 from April 1 reflects the reduced international hub prices.
"Natural gas, which forms a majority of the raw material cost for urea production in India, is a pass through for gas based urea producers up to their respective reassessed capacities. Around 80 percent of indigenous urea is produced using domestic gas," Ind-Ra said in a report.
"The indigenous urea subsidy bill will be arrested marginally by Rs.930 crore in FY 2016 pursuant," it added.
"Factoring in the November 2014 increase in gas prices, the recent downward revision will partly offset, albeit marginally, the subsidy burden by 2.4 percent. Nevertheless, urea subsidy requirements will continue to remain high despite the proposed reduction, as gas prices remain higher than the FY14 level of $4.2," it said.
The government has increased the subsidy allocation for indigenous urea to Rs.36,000 crore in the financial year just ended, from Rs.26,500 crore in fiscal 2013-14, and revised it to Rs.38,200 crore for fiscal 2015-16.
"Increased subsidy requirements are partially due to the increase in domestic gas prices from FY 2014 levels as well as a marginal increase in the use of costly imported liquefied natural gas (LNG)," Ind-Ra said.