By: ICN Bureau
Last updated : October 09, 2022 5:46 pm
Historically, the subsidy budget used to be in the range of Rs. 70,000 crore to Rs 80,000 crore p.a. during FY17 to FY20.
CareEdge has analysed the impact of elevated raw material and gas prices along-with rupee’s depreciation on the subsidy budget for the fertilizer sector.
CareEdge believes the already enhanced fertilizer subsidy budget of ~Rs. 2,15,000 crore for FY23 is likely to fall short by around Rs. 35,000 crore. This is due to the fact that prices of a majority of the key raw materials for the production of fertilizers remain elevated in H1FY23 on the back of the Russia-Ukraine war. Moreover, prices of domestic natural gas allocated to the fertilizer sector remained high in H1FY23 and the same further increased by nearly 40% w.e.f. October 01, 2022, for H2FY23. There has nearly been a 7% depreciation of the Indian rupee vis-à-vis the US dollar in H1FY23, which increases the subsidy requirement since a majority of key raw materials for fertilizers are imported.
Increasing Raw Material Prices
Apart from natural gas, most key raw materials for the production of fertilizers include Ammonia, Phosphoric Acid, Rock Phosphate and Sulphur. In this, other than Sulphur, the prices of all key raw materials were elevated in H1FY23 on the back of the Russia-Ukraine war.
Domestic Natural Gas Prices Rise
After experiencing low natural gas prices for FY21 & FY22, prices of domestic natural gas surged significantly in H1FY23. The prices of domestic natural gas were further increased by nearly 40% w.e.f. October 01, 2022 for H2FY23. Also, prices of imported natural gas in the spot market stood much higher than domestic natural gas. Very high natural gas prices are likely to result in higher subsidy requirement for FY23.
Trend of Urea and Di-ammonium Phosphate Prices
Out of India’s total consumption of fertilizers, urea constitutes 55% to 60% wherein Ammonia is the key raw material. Further, as retail prices of urea are capped by the Government of India, there is a large subsidy pay-out with respect to the consumption of urea in India. Accordingly, urea subsidy comprises a very large part of India’s total fertilizer subsidy budget wherein prices of Ammonia have a crucial role. Ammonia prices, though moderated a bit, remained at an elevated level of USD 1,100/tonne in August 2022. Further, nearly one-third of the domestic urea requirement is being met through imports wherein depreciation of INR would further add to the subsidy budget.
For manufacturing complex fertilizers, apart from natural gas, Phosphoric Acid, Rock Phosphate, Potash and Sulphur are among the key input materials whose prices also remain at an elevated level, except for Sulphur prices, which have corrected over the last three months. India has a very high import dependency for Phosphoric Acid, Rock Phosphate and Potash wherein apart from their elevated prices, depreciation of rupee would require a higher subsidy budget to keep the retail prices for farmers at an affordable level.
Historically, the subsidy budget used to be in the range of Rs. 70,000 crore to Rs 80,000 crore p.a. during FY17 to FY20. The total subsidy outlay increased by 58% during FY21 to ~Rs. 1,28,000 crore mainly due to additional allocation under the Atmanirbhar package of ~ Rs. 62,600 crore targeted towards clearing previous subsidy backlogs.
Subsidy pay-out increased further to ~ Rs. 1,58,000 crore in FY22 with an increase in gas prices leading to a higher subsidy for urea whereas an increase in raw material prices led to a high subsidy for complex fertilizers during the year.
In the budget for FY23, the government had initially provided for a total subsidy of Rs. 1,05,000 crore, which was subsequently enhanced by another Rs. 1,10,000 crore, looking at the elevated level of raw material and gas prices taking the total subsidy budget for FY23 to Rs. 2,15,000 crore.
CareEdge View
As prices of key raw materials remain elevated and natural gas becomes expensive too, CareEdge believes the double whammy along with the rupee’s depreciation could lead to a shortfall of ₹35,000 crore in the fertilizer subsidy budget.
“Notwithstanding the issues around raw material and natural gas prices, there has been a timely release of fertilizer subsidy by the government till now, which has resulted in lower receivables for fertilizer companies and consequent lower utilisation of working capital limits with adequate liquidity buffers in place. Moreover, the government has shown its intent to further enhance the subsidy budget for the upcoming Rabi season in case input costs remain elevated. However, if the fertilizer subsidy budget is not enhanced, then subsidy receivables of fertilizer companies could increase towards the end of FY23, which in turn would hurt the sector” said Hardik Shah, Associate Director – Corporate Ratings.