Volatile natural gas prices may upset fertilizer subsidy math

The Centre’s fertilizer subsidy has more than doubled from ₹1.05 trillion initially estimated for this fiscal to ₹2.15 trillion so far. By the end of March, this could even go up further to around ₹2.5 trillion or more, one of the people cited above said, seeking anonymity.

However, for the year starting 1 April, the government plans to initially set the budget estimate for fertilizer subsidies at a lower level—in the range of around ₹1 trillion—but will raise the allocation as the year progresses depending on the requirement, the person said.

Two-thirds of India’s annual fertilizer subsidy goes towards urea, the most commonly used soil nutrient produced from natural gas. Domestic producers have been facing a gas shortage due to the conflict in Eastern Europe.

“The budget estimate is just a figure. What is important is that the government is committed to making fertilizer available to the farmer at a reasonable price, whatever it takes. With that commitment in place, the subsidy requirement will be re-evaluated throughout the year, and higher subsidies will be provided as needed. Without that firm commitment, we cannot expect public and private companies to go ahead and manufacture or import in advance,” said the person cited above. Fertilizer subsidy is given to companies based on their reported sales, and timely disbursals are crucial for their financial health.

A higher food and fertilizer subsidy bill has weighed on India’s fiscal deficit this fiscal, with the gap between revenue and spending expected to overshoot the budget estimate of ₹16.6 trillion in absolute terms. However, due to soaring inflation, the deficit as a percentage of nominal GDP is still expected to remain within the target of 6.4%.

High energy and commodity prices have affected government and household budgets in the past year and have forced central banks in the UK, Europe and the US to tighten monetary policy to tame inflation, with many fearing a recession in the US and parts of the euro zone in 2023.

India has spent around ₹1.52 trillion on fertilizer subsidies as of November, with that month’s expenses alone reaching over ₹49,000 crore, a significant increase from the over ₹21,300 crore spent in October. If current spending levels are maintained, the total cost of fertilizer subsidies for this fiscal could increase, according to experts.

Manish Gupta, senior director at CRISIL Ratings Ltd, said that while the budgeted subsidy amount should be enough to meet non-urea fertilizer sales for this fiscal, a continued surge in gas prices could increase the risk for the urea segment.

“Basis CRISIL Rating’s estimates, overall, there could be a subsidy build-up of around ₹40,000-45,000 crore for this year, over the announced bill of ₹2.15 lakh crore,” said Gupta.

Policymakers are monitoring the prices and hoping for a decline in gas prices due to a warmer-than-usual winter in Europe that may take some steam off energy prices.

There are over two dozen gas-based urea production units in the country, with some more new capacity expected in coming years. Fertilizer producers source half of their gas requirements through imports. This year’s target for urea production is nearly 32 million tonnes. India imports around 25% of its urea requirement but is fully dependent on muriate of potash for imports, another commodity that infuses uncertainty into the subsidy calculations.

An email sent to spokespeople for the finance ministry on Monday and the department of chemicals and fertilizers on Wednesday seeking comments for the story remained unanswered at the time of publishing.