The Centre’s fertilizer subsidy bill is set to touch an all-time high of Rs 1.65 lakh crore this fiscal against Rs 1.05 lakh crore budgeted, due to an unprecedented rise in the cost of raw materials.
As per Crisil Ratings, in the past two fiscals, it has paid an additional Rs 1.2 lakh crore and increased the budgeted subsidy.
However, the credit rating agency said that the steep rise in raw material prices has been negating this, and another intervention may be needed in this fiscal.
Not doing so would take the subsidy arrears to an all-time high of over Rs 75,000 crore by end of this fiscal, it said.
“Over 85 percent of the subsidy arrears could be contributed by urea. This is because pooled gas prices – a blend of domestic gas and imported LNG considered for billing to fertilizers plants – had shot up more than 75 percent last fiscal, and is expected to remain elevated for the most part of this fiscal because of the Russia-Ukraine conflict,” said Nitesh Jain, Director, Crisil Ratings.
“At the same time, retail prices of urea have stayed put, increasing the government’s subsidy burden. This would be despite some respite likely from the commissioning of new domestic capacities that could potentially halve India’s import dependence for urea from nearly 28 percent in fiscal 2021.”
At present, the retail selling price (RSP) of urea is fixed by the government.
Besides, to spur farmers to use fertilizers for better crop yield, the government keeps the RSP significantly lower than the market rate and reimburses the urea makers through subsidy payments.
“While this protects the profitability of urea makers to a large extent, the RSP remaining unchanged despite rising costs will mean the government will have to foot a bigger subsidy bill.”
“Likewise, prices of phosphoric acid and rock phosphate – ingredients for non-urea fertilisers1 – have also gone up by 92 percent and 99 percent, respectively, in the past 12 months through March 2022.”
Furthermore, given that Russia, Belarus, and Ukraine are the major suppliers of non-urea fertilizer ingredients, the ongoing conflict will only exacerbate the situation.
“While non-urea makers have hiked prices, it may not be sufficient to cover the escalation in cost. For non-urea fertilizer makers, the government pays subsidies as per the nutrient-based subsidy (NBS) rates, which are yet to be announced for this fiscal. Therefore, a revision in NBS rates bears watching…”
In addition, the credit rating agency predicted a 3 percent on-year growth in demand for fertilizers and moderation of raw material and fertilizer prices in the second half of this fiscal.
“If demand is higher than expected, or input prices do not soften even in the second half, the subsidy bill may inch up to Rs 1.8-1.9 lakh crore.”
