Subsidy alert on the fertiliser front

AN inkling of the storm brewing around fertilisers came to the fore in mid-May when Prime Minister Narendra Modi appealed to farmers to use less chemical fertilisers. Subsequently, Finance Minister Nirmala Sitharaman flagged three critical Fs — fuel, foreign exchange and fertilisers.

Initially, the focus had been on fuel and foreign exchange. This was inevitable as crude oil and natural gas prices were soaring, while rapid rupee depreciation sparked concerns over the widening of the current account deficit. Fertilisers had seemed a secondary issue in comparison to the energy shock and the plummeting rupee. That’s no longer the case.

The outlook for the fertiliser sector has been worrisome ever since the US and Israel launched an attack on Iran in late February. A major concern is the skyrocketing of fertiliser prices in world markets over the past three months of the conflict. This includes urea, diammonium phosphate (DAP) and muriate of potash (MOP). Urea is the most widely used fertiliser in this country with an annual consumption of roughly 40 million tonnes. Imports comprise about 25 per cent of the usage.

In the case of DAP, imports meet about half of the annual demand; for MOP, the entire requirement comes from abroad. Of these imports, nearly half are supplied from West Asia.

The cost of domestic manufacturing is going up at the same time. This is due to enhanced global prices of natural gas, which serves as the feedstock for most indigenous fertiliser plants. As much as 85 per cent of natural gas used as feedstock is sourced through imports. Natural gas prices have nearly doubled from $10-11 per mmbtu (metric million British thermal units) to around $18 per mmbtu during the war in West Asia. Other raw materials and intermediates needed by domestic fertiliser plants, including sulphur and ammonia, are mostly sourced from the Gulf region. Here, too, prices have risen by over 80 per cent.

Availability may not be a problem for the time being as fertiliser stocks are currently sufficient to meet about 50 per cent of the projected kharif demand. About 20 million tonnes are available as against the expected requirement of 39 million tonnes during the season. Going forward, much will depend on how soon the Strait of Hormuz is opened up and supplies from West Asia reach this country in time and in sufficient quantity.

The immediate worry, however, is a rapidly rising fertiliser subsidy bill, which could lead to a widening of the fiscal deficit in the current financial year. The budgetary allocation for fertiliser subsidy had been kept at Rs 1.7 lakh crore for 2026-27. With prices of imported fertilisers having risen by as much as 120 per cent over the past three months, projections are that the subsidy bill could virtually double to Rs 3.5 lakh crore.

This is not just on account of higher prices for imported fertilisers. With rising gas prices, the cost of indigenously produced fertilisers will also rise substantially. Under the current subsidy system, prices of this crucial input are kept low to reduce the burden on farmers, and the fertiliser industry is given compensation. The situation is compounded by the rupee’s depreciation, which has accelerated over the last few months. It has raised import costs across the board and fertilisers are no exception.

The overall subsidy bill is also likely to go beyond budgetary estimates. Petroleum subsidy, for instance, has been kept at

Rs 12,085 crore, which will not be enough, given the losses being incurred by oil companies due to high global crude prices in recent months. Even last year, the subsidy outgo was as high as

Rs 28,000 crore. Food subsidy has been pegged at Rs 2.3 lakh crore.

The expansion of the subsidy bill will constrain efforts to contain the fiscal deficit at 4.5 per cent of GDP. Revenue collections have so far been on track with GST (Goods and Services Tax) inflows sustaining growth in April and May. These will have to be accompanied by robust direct tax revenues in the coming months. Even this may not be sufficient to keep the deficit under control unless the West Asia war concludes and the Strait of Hormuz is reopened soon. It will still take a few months thereafter to normalise the situation in regard to both energy and fertilisers.

In the long run, however, a strategy must be evolved to ensure that the crisis like the current one is managed without putting an enormous strain on the exchequer. The need to ensure that fertilisers as well as other inputs are provided at subsidised prices to farmers has been the bedrock of existing policies in this sector. The problem is that the policy has brought about an imbalance in the usage of nutrients, with urea being the most widely used fertiliser.

A shift to a direct benefit transfer system could be a solution as it would provide income support directly to the farmer. Prices of various types of fertilisers would then become more realistic, which would, in turn, enable a more balanced use of these nutrients.

The heavy import dependency on natural gas for domestic fertiliser plants also needs to be dealt with to avoid supply disruptions. One way is to build larger LNG storage and regasification facilities. Alternative feedstocks like naphtha should also be available in case of natural gas shortages. Diversification is equally needed in sourcing fertilisers and their raw materials rather than relying heavily on Gulf countries. Building up fertiliser buffer stocks can be another long-term remedy.

The ballooning of the fertiliser subsidy to unsustainable levels indicates that structural changes are needed in the system governing farm inputs. This includes expanding the role of more environment-friendly nutrients and reducing that of chemical fertilisers. But this is a process that needs to be carried out in collaboration with farmers, who have for decades relied on chemical fertilisers to achieve higher productivity. Reforms in the system of providing agricultural inputs must be carried out not only by educating farmers but also by ensuring adequate income and infrastructure support.