Fertilizer subsidies are expected to hit an all-time high of Rs 1.65 crore this fiscal year against the budget estimate of Rs 1.05 crore due to an unprecedented rise in the cost of raw materials and fertilizers in the world, according to a report.
India’s fertilizer subsidies are expected to reach a record Rs 1,650 crore and further subsidies and a review of Nutrient Based Subsidy (NBS) rates are crucial to maintaining the credit profile of fertilizer manufacturers, Crisil said in a report.
“Our assessment assumes fertilizer demand growth of 3% year-on-year and moderation in commodity and fertilizer prices in the second half of this fiscal year if demand is higher than expected or input prices do not fall even in the second half of the year the subsidy bill could rise to Rs 1.8-1.9 crore,” the report added.
According to the report, the government paid an additional Rs 1.2 lakh crore in the last two fiscal years and increased the budgeted subsidy.
However, sharp increases in commodity prices have wiped it out and further intervention may be needed in 2022-23, the Crisil report notes. “More than 85% of the arrears in subsidies could be due to urea.
In fact, combined gas prices (a mix of domestic gas and imported LNG billed to fertilizer plants) increased by more than 75% in the last fiscal year and are expected to increase for 2022-2023 due to the conflict between Russia and Ukraine. . Crisil ratings director Nitesh Jain said.
At the same time, urea retail prices remained unchanged, increasing the burden of government subsidies, he noted. “This would come despite a respite, likely due to the commissioning of new domestic capacity that could halve India’s reliance on urea imports by nearly 28% in FY2021,” he said, adding.
The retail selling price (RSP) of urea is set by the government, the report explains. To encourage farmers to use fertilizers for better crop yields, the government keeps the RSP well below the market price and compensates urea producers with subsidies, he said.
While this largely protects the profitability of urea producers, the RSP, which remains unchanged despite rising costs, will mean the government will have to pay a higher subsidy bill, he added. Similarly, the prices of phosphoric acid and phosphate rock, components of non-urea fertilizers, also increased by 92% and 99%, respectively, during the 12 months to March 2022.
Since Russia, Belarus, and Ukraine are the main suppliers of fertilizer ingredients other than urea, the ongoing dispute will only exacerbate the situation, he said.
Although manufacturers of non-urea products have raised prices, it may not be enough to cover rising costs, Crisil said. For non-urea fertilizer manufacturers, the government will pay a subsidy at Nutrient-Based Subsidy Rates (NBS), which have not yet been announced for this fiscal year.
In this sense, the credit profiles of fertilizer producers will depend on factors such as additional subsidies, mainly for urea producers, and the revision of NBS rates for non-urea producers. Any delay or insufficiency in subsidy payments can affect the cash flow of fertilizer manufacturers and lead to higher working capital needs, the report added.