scorecardresearchRussia-Ukraine crisis to push up fertiliser prices and govt subsidies
The government's fertiliser subsidy bill in the current fiscal year may go up by about  <span class='webrupee'>₹</span>10,000 crore due to the Russia-Ukraine war

Russia-Ukraine crisis to push up fertiliser prices and govt subsidies

Updated: 14 Mar 2022, 05:01 PM IST
TL;DR.
Russia accounts for nearly 23 percent of the world's supplies of ammonia and potash each. Together with Belarus - the other major supplier of potash (20 percent), this region supplies 43 percent to world potash pool.

The crisis in Ukraine following the invasion by Russia has sent shock waves throughout the world economy. 

In India, even as the steep rise in energy import bill will affect almost all sectors of the economy, the impact on fertilizers will be more pronounced. At the outset, let us capture a few relevant facts.   

Despite prognostications by successive governments during the last four decades or so that India would become self-reliant in fertilizer availability and putting in place policies aimed at achieving the goal, even today, the country remains preponderantly dependent on imports for meeting the requirements of its farmers.

Demand for fertilisers in India

Three most popular fertilizers used by farmers are urea, di-ammonium phosphate (DAP) and muriate of potash (MOP) being the major source of ‘nitrogen’, ‘phosphate’ and ‘potash’ nutrient respectively. 

Natural gas (NG) is the raw material (a more apt phrase is feedstock/fuel) used for manufacture of urea whereas phosphoric acid and ammonia are the prime raw materials (RMs) needed for making DAP.

With a requirement of 3 million tonnes, India’s potash requirement is totally met by imports from Belarus and Russia.

In case of DAP, nearly 50 percent of India’s requirement is sourced from other countries whereas all of MOP needed by farmers is imported. All of the phosphoric acid and bulk of ammonia required is imported. 

Coming to urea, 1/3rd of the requirement is imported. Even for the balance of 2/3rd produced domestically, India depends on the import of natural gas (it comes as liquefied natural gas or LNG) to the extent of 1/3rd. 

This is when fertilizer gets priority in allocation of domestic gas (supplied at ‘low’ administered/ subsidized price) next only to household consumption and use in transportation. If, this priority goes, dependence on LNG import will go up. 

Russia accounts for nearly 23 percent of the world's supplies of ammonia and potash each. Together with Belarus - the other major supplier of potash (20 percent), this region supplies 43 percent to world potash pool. 

Russia alone makes up for 14 percent of world urea supplies whereas in DAP, its contribution is around 10 percent.

In fact, in November 2021, Russia’s fertiliser exports to India jumped by a whopping 469% to $106 million from over a year ago, according to the international trade data platform Observatory of Economic Complexity.

Yet, on Feb. 28 this year, finance minister Nirmala Sitharaman had expressed concern over the impact of the Russia-Ukraine war on India’s trade, “,particularly to the farming sector.”

This assumed significance, given the assembly elections in agriculturally dominant states of Punjab and Uttar Pradesh which concluded on March 7. Prime minister Narendra Modi’s administration would not want to leave any stone unturned to regain lost ground, especially following the controversial farm laws of 2020.

“We are trying to get DAP and MOP from Jordan, Morocco, and Canada to meet the fertiliser requirement for the next financial year,” Kishor Rungta, chairman at Fertiliser Association of India (southern region), told the BusinessLine newspaper.

In a bid to insulate farmers against rising prices, the Indian government is also preparing to negotiate with Russia for the long-term supply of fertilisers for the first time in 30 years, Reuters reported.

What about India’s domestic fertiliser manufacturing?

Experts have, for long, sought a liberal agriculture policy to promote fertiliser production in India.

The lack of a non-cohesive policy has compelled several top fertiliser manufacturers like Tata Chemicals and Aditya Birla Group to exit or scale down their business. 

They have cited factors like a lopsided usage of urea, delayed subsidy payments to manufacturers, and a lack of investment in the sector to justify the scale down.

In 2019, India revived five fertiliser manufacturing units to maximise domestic production, but these plants only focus on the highly-subsidised urea. 

India imports 25% of its requirement of urea, 90% in case of phosphates, either as raw material or finished fertilisers and 100% of potash.

Fertiliser subsidy may exceed RE by RS 10K crore

The government's fertiliser subsidy bill in the current fiscal year may go up by about 10,000 crore due to the Russia-Ukraine war, but higher tax revenues will help keep the fiscal deficit close to the estimated 6.9 per cent level, an official said.

The official further said the oil prices are expected to cool in the next 2-3 months on higher production from the US and OPEC member countries.

The Revised Estimates (RE) had pegged the fertiliser subsidy at over 1.40 lakh crore in the current fiscal year, while the Budget Estimate (BE) for the next fiscal year is estimated at over 1.05 lakh crore

"We expect oil prices to cool in next 2-3 months. The rising oil prices would not alter the budget math of the government much in the current fiscal except for fertiliser subsidy which is likely to go up by about 10,000 crore," the official said.

The official further said that since farmers need to stock up fertilisers before the beginning of the sowing season, import of potash -- a key component in fertiliser manufacturing-- cannot wait for international prices to cool.

Also, rise in prices of natural gas, a key raw material for the manufacturing of urea and comprising nearly 70 per cent of the total cost of producing urea, in the global market would lead to rise in domestic prices of urea.

International crude oil prices shot up to 14-year high of USD 140 per barrel early last week before retracting to near USD 112 on Friday.

But even this rate is 45 per cent higher than the USD 80-87 range of January when most of the Budget 2022-23 would have been prepared.

The official said that even at this elevated level of spending, the fiscal deficit would remain close to the 6.9 per cent level in the current fiscal year as pegged in the revised estimates.

"India's fiscal deficit would be close to 6.9 per cent as given in the revised estimate as higher tax revenues will offset the gap in the non-tax revenues and higher fertiliser subsidy outgo. As of now, we will remain close to the numbers given in the RE for this year and in the Budget Estimates for next fiscal," the official added.

In the RE for the current fiscal year ending March 31, the fiscal deficit has been revised a tad higher at 6.9 per cent of GDP, from 6.8 per cent estimated earlier.

 

Ministry wise budget allocation
Ministry wise budget allocation