Subsidy increase for phosphatic fertilisers critical to ensure availability of fertilisers in the upcoming rabi season: ICRA

Subsidy increase for phosphatic fertilisers critical to ensure availability of fertilisers in the upcoming rabi season: ICRA

The systemic inventory of phosphatic fertilisers in Indian markets has decreased significantly, which is cause for concern as the rabi season approaches. This was due to a decline in imports, owing to rising international prices and limited supply in international markets, while domestic demand remained stable. ICRA anticipates that the GoI will alleviate industry stress by increasing subsidy rates under the NBS scheme over a one-month period to ensure adequate availability for the upcoming rabi season.

Mr. Sabyasachi Majumdar, Group Head & Senior Vice President, ICRA, added, "The systemic inventory of phosphatic fertilisers has depleted since the start of FY2021 due to lower imports due to higher international prices and unfavourable cost economics of selling DAP at current retail price and subsidy levels." While the Government of India increased subsidy levels under the Nutrient Based Subsidy (NBS) scheme in May 2021 to offset the impact of international price inflation, prices have since increased further, necessitating another round of subsidy increases. While the industry has encountered opposition from the Government of India regarding raising the retail price of DAP, the retail price of other complex grades has been increased by up to Rs. 500-1000/MT to reflect the impact of raw material price inflation. Resumption of imports is thus critically dependent on the Government of India either increasing subsidy rates or allowing the industry to increase retail prices for phosphatic fertilisers freely over the next one month. We estimate that the Government of India will need to increase the subsidy for DAP by approximately Rs. 5000-6000/MT to ensure stable profitability for the industry and to maintain reasonable retail prices for farmers.”

India began FY2022 with lower systemic inventories, which, combined with lower production and imports, resulted in stock depletion in the face of robust demand supported by nearly stable sowing levels. In April 2021, production levels were impacted as companies awaited the announcement of subsidy rates amid rising input prices and international prices. Retail sales remained healthy, albeit lower than 5M FY2021, owing primarily to panic buying during the last kharif season, sparked by the Covid-19 pandemic's uncertainty. Fertiliser demand in the United States and Brazil continues to be strong as these economies increase corn and soybean acreage in the face of record high crop prices. As a result, demand for fertilisers has remained robust in these economies, resulting in fertiliser prices reaching decade high levels due to limited supply.

The Indian fertiliser industry remains reliant on imports to meet domestic demand due to limited domestic supplies. The reliance on imports for urea remains significant, owing to the delay in commissioning the new urea plants that would have increased domestic production. In the case of DAP, import reliance will persist in the absence of new capacity in the segment in India.

Mr. Prashant Vasisht, Co-Group Head & Vice President, ICRA, added, "International prices were expected to moderate in H2 FY2022, but with China suspending fertiliser exports, rising energy prices, and continued robust demand for fertilisers from Brazil and the US, prices are expected to remain firm through the rabi season." Additionally, with imported urea prices reaching $510/MT and the expectation that natural gas prices will continue to rise due to depleted global natural gas inventories, urea prices will continue to rise. As a result, we anticipate that the current fertiliser subsidy budget will fall short of meeting the year's total requirement in the absence of additional budgetary allocation from the Government of India. Given the Government of India's recent actions to ensure adequate budgetary allocation for the fertiliser subsidy budget, we anticipate that additional funds will be allocated in conjunction with the revision of the NBS rates for phosphatic fertilisers.”