Budget 2023 needs to play the hard ball on fertiliser subsidy

In a business-as-usual scenario, there won’t be any respite from a high fertiliser subsidy. Things could change if the Modi government plays the hard ball in Budget 2023 by going for measures such as urea decontrol and direct benefit transfer (DBT) or a significant increase in maximum retail price

Fertiliser subsidy is payments made to manufacturers or importers to cover the excess of the cost of production/import and distribution.

Propelled by the need to return to a fiscal consolidation path, the Union government is keen to rein in major subsidies. It wants to slash fertiliser subsidies from the likely actual of around Rs 2.50 lakh crore during the current fiscal year (FY) to Rs 1.40-1.50 lakh crore during FY2024. Going by the past trend, this seems unlikely. During FY2021, finance minister Nirmala Sitharaman targeted an outgo of Rs 70,000 crore on fertiliser subsidy but the actual turned out to be Rs 1.38 lakh crore. During FY2022, the budget estimate (BE) was Rs 80,000 crore but the actual was double at Rs 1.62 lakh crore. For FY2023, BE was Rs 1.05 lakh crore.

Against this backdrop, even if Sitharaman targets Rs 1.50 lakh crore for FY 2023-24, the year will end up with huge slippage. Fertiliser subsidy is payments made to manufacturers or importers to cover the excess of the cost of production/import and distribution (or cost of supply) over a low maximum retail price (MRP) they are directed by the Union government to charge from the farmers. The subsidy on each tonne of fertiliser produced (or imported) and sold is nothing but the difference between the cost of supply and MRP. When multiplied by the total quantity of fertiliser sold in a year, it gives aggregate subsidy payments.

The two crucial factors are MRP and the cost of supply. Given the massive political ramifications of any hike in MRP and a spate of elections during 2023/2024, the government won’t dare to bring about even a small hike in retail prices. As for the cost of supply, India is overwhelmingly dependent on imports: 50 percent of di-ammonium phosphate (DAP), 100 percent of muriate of potash (MOP), nearly 100 percent of phosphoric acid and ammonia (raw materials used in making non-urea fertilisers), and over 30 percent of urea are imported. Even for making domestic urea, natural gas is imported for at least 1/3rd of its requirement.

Import dependence

A major slice of these imports is from countries impacted by the Ukraine war – 50 percent of MOP from Russia and Belarus, 20 percent of phosphoric acid from Russia, Belarus and Ukraine; 15 percent of ammonia from Russia, 10 percent of natural gas from Russia, 60 percent of DAP from China and Saudi Arabia and over 30 percent of urea from China.

The war has resulted in a disruption in supplies and a steep increase in the price of fertilisers and raw materials, leading to high subsidy outgo during FY 2022-23. Given the unfolding geo-political and military situation, there seems to be no end to the war at least till the end of 2023. Therefore, any relief from the current tight global supply and elevated fertiliser prices is highly unlikely.

The government has been trying to diversify sources of supply, for instance, buying more MOP from countries such as Canada, Israel and Jordan, or more DAP from Saudi Arabia and Morocco. But these efforts have only helped in ensuring adequate supplies, and not in securing lower prices. Signing long-term deals under the current tight supply scenario also won’t yield any major concession in price.

Cheaper Gas

The government wants to lower the cost of natural gas by “incentivising companies that contract fuel at better prices”. Under a system of pooling natural gas to supply all urea plants at a uniform delivered price (UDP), even as individual units pay as per their weighted average delivered cost, GAIL India as the pool operator notifies the UDP. A unit that pays less than UDP has to deposit the differential amount with the pool, whereas another unit that pays more gets the difference from the pool. Thus, the ability of a urea manufacturer to purchase gas at a lower price is not rewarded, just as there is no disincentive for others who buy at a higher price. Hence, any talk of incentivising companies is laughable.

The government is also pinning hopes on nano-liquid urea or urea in the form of nanoparticles. It provides nitrogen to plants in liquid form as an alternative to conventional urea. A 500ml bottle of nano urea is equivalent to a 45 kg bag of conventional urea. While selling a bag for Rs 242 requires subsidy support of Rs 2,758, a 500ml bottle is available to farmers at the same price sans subsidy. A 45 kg bag of conventional urea contains 46 percent nitrogen or 20 kg, whereas a 500 ml bottle of nano urea has 4 percent nitrogen or 20 grams. Yet, the two are treated as equal. Can a mere 20 grams in nano urea deliver what 20 kg in conventional urea does? The answer could be ‘Yes’ if miracles happen.

In a business-as-usual scenario, there won’t be any respite from a high fertiliser subsidy. Things could change if the Modi government plays the hard ball by going for measures such as urea decontrol and direct benefit transfer (DBT) or a significant increase in MRP.

UTTAM GUPTA is a policy analyst. Views are personal and do not represent the stand of this publication.

https://www.moneycontrol.com/news/opinion/union-budget-2023-hard-ball-on-fertiliser-subsidy-9960821.html