SIDDHARTH's Blog

 With a sharp spike in prices of liquefied natural gas (LNG) which has pushed up the cost of production of urea, the fertilizer subsidy is likely to cross Rs 2.5 trillion in the current fiscal, 138% higher than the budget estimate of Rs 1.05 trillion, according to official sources.

A similar level of fertiliser subsidy expenditure is expected in FY24 too, the sources added.

The government is working out measures for ensuring that LNG is supplied to fertiliser companies at a lower price. One of the proposals being discussed is asking state-run GAIL (India) to procure the fuel on behalf of Indian companies under short-tern contracts. There has been concern about the way the fertiliser companies deal with the issue of gas price as the entire burden of subsidy is borne by the government.

It would be the fourth year in a row that the annual Budget spending on fertiliser would be above Rs 1 trillion mark this fiscal, against a lower range of Rs 70,000 – 80,000 crore in the past few years.

Rating agencies – ICRA & Crisil – too have pegged the government’s fertiliser subsidy to cross Rs 2.5 trillion in the current fiscal.

In case of urea, farmers pay a fixed price Rs 242 per bag (45 kg) against the cost of production of around Rs 2650 per bag. The balance is provided by the government as a subsidy to fertiliser units.

The urea units use pooled gas, which comprises domestic gas and imported LNG, a policy which had been formulated since May, 2015 by the petroleum ministry. The pooled gas price in October 2022 was around $25 million metric BTU (mmbtu) and has jumped by almost two and half times in the last 18 months.

“Amid the Russia-Ukraine conflict, the price of pooled gas has risen by more than 10% quarter-on-quarter in September 2022,” Naveen Vaidyanathan, director at Crisil Ratings, said.

A Crisil note has stated that each dollar increase in the price of pooled gas raises the government’s subsidy burden by about Rs 7,000 crore.

According to an official with Fertiliser Association of India (FAI), the LNG pooled prices were in the range of $ 10-12/mmbtu one and half years back.

The domestic production of urea is around 26 million tonne (mt) while 9 MT of soil nutrient is imported to meet the demand. In 2021-22, India imported nearly 9.1 MT of urea, valued at around Rs. 40,000 crore.

The Crisil note also stated that the price of imported urea remains elevated at over $ 650 per tonne, almost double from a year ago.

FAI officials said that due to a continuous rise in domestic natural gas prices, the fertiliser companies get only around 7% share of domestic gas, which implies that bulk of the requirement is met through imports.

“LNG prices are directly correlated to the cost of production urea,” a top fertiliser ministry official told FE.

Out of the total LNG consumption in the country, the fertiliser companies have a share of around 35% and rest of sectors include city gas distribution (22%), power (13%), refineries (7%), petrochemical (2%) and others.

Sources said that the government is working out measures for ensuring that LNG is supplied to fertiliser companies at a lower price. One of the proposals being discussed is asking GAIL to procure the fuel on behalf of Indian companies or going for shorter contracts. There has been concern about the way the fertiliser companies deal with the issue of gas price as the entire burden of subsidy is borne by the government.

The retail prices of phosphatic and potassic (P&k) fertiliser, including DAP were ‘decontrolled’ in 2020 with the introduction of a ‘fixed-subsidy’ regime as part of NBS mechanism. However, the subsidy of DAP saw an increase to 60% of cost in FY22, from a little over 30% previously.