The Finance Ministry has been consistent in providing grossly inadequate funds for fertiliser subsidy in recent Budgets. This year’s Vote-on-Account is no exception.

But there is a major change in context: the possibility of an increase in gas prices. The Government has simply not factored this in.

Gas effect A drastic increase in the basic price of domestic gas with effect from April 1, 2014, will deliver a body blow to the urea fertiliser sector. If the basic price is increased, there will also be an increase in transportation tariff and local taxes.

An increase in basic price of more than $4 per million BTU (British Thermal Units) will have an impact of almost ₹10,000 crore on supply of 31.5 MMSCMD (million metric standard cubic metres per day) of domestic gas to the fertiliser sector.

The fact that domestic gas price is denominated in dollars will add to the woes of the urea industry; the depreciation of the rupee vis-à-vis the dollar will add to the rupee cost of natural gas.

In view of the artificially low retail price of ₹5,360 a tonne urea, it is expected that there will be an over 5 per cent growth in demand next year.

This will necessitate the additional import of about 1.5 million tonnes of urea. At the prevailing CIF price of $350 a tonne, it will entail a total additional subsidy of almost ₹3,000 crore next year.

There will be an additional subsidy implication on the entire import of about 9.5 mt if the rupee depreciates vis-à-vis the dollar.

Incidentally, international urea prices bottomed out in 2013-14 and they are likely to go up from the present level.

The use of P&K (phosphorus and potassium) fertilisers has been falling in the last few years due to high retail prices. Prices increased mainly due to two reasons: large reduction in subsidy under nutrient-based subsidy (NBS) and depreciation of the rupee over the last three years.

Negative growth

However, the international prices of raw materials, intermediates and finished products for P&K fertilisers also seem to have bottomed out this year. Farmers must be cushioned from any increase in international prices and the impact of depreciation of the Indian currency. There must be a serious effort to correct the nutrient imbalance.

The retail prices of these fertilisers must be kept at the current level in order to encourage their use.

A conservative growth of 4 per cent in the consumption of these fertilisers will result in an increase of ₹1,000 crore in subsidy for them. Therefore, even if one does not take into account rupee depreciation, there can be a net increase in subsidy for P&K fertilisers.

What is required Mainly taking into account the impact of an increase in gas price, higher consumption of fertilisers and a minor increase of ₹350 per tonne on fixed cost for existing domestic production, there will be an increase of at least ₹15,000 crore in fertiliser subsidy for 2014-15 over 2013-14. These figures do not take into account unpaid dues under various heads such as non-revision of energy cost for 2013-14, freight bills, difference in total concession and on-account payment, and so on. Some of these dues have been pending for more than a year.

In other words, a ₹15000 crore increase in subsidy next year is a very conservative estimate. Therefore, the requirement of subsidy only for 2014-15 should be about ₹83,000 crore (₹68,000 + ₹15,000 crore).

A carryover of ₹32,000 crore from this year to the next added to this figure makes it ₹1,15,000 crore — the amount that should have been allocated for fertiliser subsidy in the Budget Estimate for 2014-15.

Thus there is under-provision of at least ₹47,000 crore. The budgeted provisions will be exhausted in the first quarter of 2014-15 after clearing the arrears of 2013-14 and on-account payment for 3-4 months. The Finance Minister seems to have made a quarterly budget rather than an annual one as far as fertiliser subsidy is concerned. He has left a huge gap between requirement and provision for fertiliser subsidy.

Ironically, for the last three years, the government has been expressing its intention to bring about reforms in the urea sector.

This year too, in the section on the Fiscal Responsibility and Budget Management Act 2013, it says: “On fertilisers, nutrient based subsidy regime has been working well in the P&K sector.

What is now urgently required are certain pricing reforms in the urea sector with an immediate price correction for urea. This is not only essential from viewpoint of the size of the subsidy bill but also from the viewpoint of balanced use of N, P & K nutrients.”

These intentions are not matched by action. The present level of subsidy on urea is about 70 per cent of its domestic cost of production. In the absence of any significant increase in the retail price of urea and a drastic increase in the gas price, urea will be subsidised by more than 80 per cent of its cost of production.

Ten years of inertia over urea pricing have led to nutrient imbalance. The inadequate allocation for fertiliser subsidy over the years has brought the industry to the brink of sickness.

(The writer is the Director General of the Fertiliser Association of India)

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