Rising input price to increase fertiliser subsidy

A sharp rise in raw material prices and a forecast of further increases are likely to put pressure on the government’s fertiliser subsidy Bill.

The cost of natural gas has increased by 17.5 per cent for the second half of the current financial year (the government revises the price every six months) to $2.89/mBtu, from $2.46/mBtu for the first half between April and September. The government has said this is due to the sharp increase in crude oil prices; in the first half, it rose 22 per cent to $64.37 a barrel, from $52.71.

To make fertiliser affordable, the government provides a subsidy to manufacturers which it wants to transfer directly into the account of farmers through the Direct Benefits Transfer (DBT) scheme by next year. Before that, however, it plans to clear the backlog of around ~30,000 crore, a source of much financial discontent for the manufacturers. Payment delays impact working capital for the companies, in turn affecting their finance cost and profit.

“The cost of natural gas is expected to increase further, due to the rise in the cost of crude oil. This will increase the input cost of fertiliser manufacturers and put pressure on the government subsidy bill,” said Madan Sabnavis, chief economist, CARE Ratings.

So far in FY18, production of urea has been lower compared with last year. Imports declined, too, but at a higher rate. This suggests a decline in consumption, due to better implementation of the soil health card, which aims to bring the levels of soil to the ideal nitrogen, phosphorus and potassium ratio of 4:2:1; it is now 6.8:2.7:1.

Meanwhile, India’s fertiliser production is likely to increase with the government’s decision to revive five defunct plants at various locations. This is being done by setting up new ammonia-urea plants, with capacity of 1.27 million tonnes annually. India’s urea production has been growing at a stable 1.7 per cent compounded annual rate from FY13 to FY17. Indigenous urea has constituted almost 60 per cent of overall fertiliser production; import dependence came down from 26.3 per cent to 18.5 per cent in FY17.