Special Subsidy Extended Until 2025 to Stabilize Fertilizer Prices, But Falling Rupee Raises Concerns
In a bid to ensure that the prices of di-ammonium phosphate (DAP), India’s second most consumed fertilizer, remain stable for farmers, the Indian government has extended the special subsidy of Rs 3,500 per tonne. This extension, which was due to expire on December 31, 2024, will now continue until December 31, 2025. The decision, approved by the Union Cabinet on Wednesday, comes as a response to increasing pressures on farmgate prices, exacerbated by the steep fall of the Indian rupee against the US dollar.
The fertilizer subsidy is aimed at curbing price hikes for DAP, which has seen a surge in import costs due to the depreciation of the rupee. While the subsidy provides some relief, industry experts warn that the continuation of this policy might not be enough to prevent a crisis in fertilizer imports, particularly in light of rising costs and the challenges in sustaining price caps.
DAP Subsidy Structure and Impact of the Falling Rupee
The government’s move to freeze the maximum retail prices (MRPs) of non-urea fertilizers, including DAP, has provided stability for consumers and farmers alike. However, the steep depreciation of the rupee is causing substantial strain on fertilizer producers. At the current exchange rate of Rs 85.7 to the US dollar, the landed import price of DAP is around $632 per tonne, which works out to Rs 54,160. Just three months ago, when the rupee was valued at Rs 83.8 to the dollar, this price was Rs 52,960.
Despite this price escalation, the government has maintained informal MRP caps. For example, the MRP for a 50-kg bag of DAP is capped at Rs 1,350, with specific prices set for various types of fertilizers. These include Rs 1,300 for the popular “20:20:0:13” complex fertilizer and Rs 1,470 for “12:32:16:0”. These caps are intended to keep prices affordable for farmers but are increasingly difficult to maintain due to the weakening rupee.
Cost Deficit in the Fertilizer Industry
The situation has become precarious for fertilizer companies. The subsidy provided by the government on DAP stands at Rs 21,911 per tonne, in addition to the Rs 3,500 “one-time special package” subsidy. However, even with the Rs 1,350 per 50-kg bag MRP, companies are facing a significant shortfall in covering their costs. At present exchange rates, the gross realization from DAP sales amounts to Rs 52,411 per tonne, which is still less than the import cost of Rs 54,160 per tonne.
A senior industry official expressed concerns, stating that the current subsidy structure will not be sustainable unless the government increases the subsidy amount or allows for an upward revision in the MRP. When factoring in additional expenses—such as the 5% customs duty, port handling, bagging, interest, insurance, and dealer margins—the total cost of imported DAP has surged to Rs 65,000 per tonne. Given these figures, importing DAP has become increasingly unviable, and further subsidies or price hikes are seen as essential to avoid a crisis.
Government Response to Industry Concerns
The government had previously approved a compensation scheme on September 20, 2024, for fertilizer companies covering any imports of DAP made at a landed price higher than the base benchmark rate of $559.71 per tonne. This compensation was to be applicable for shipments arriving between September 1, 2024, and March 31, 2025, based on an exchange rate of Rs 83.23 to the dollar. However, with the rupee’s fall to Rs 85.7 to the dollar, these calculations have been rendered obsolete, raising doubts about the sufficiency of the compensation.
Industry experts are calling for a revision of the MRP for DAP to offset the depreciation of the rupee. They argue that without this adjustment, fertilizer imports will become increasingly unsustainable, posing a threat to both the agricultural sector and the economy. While some industry representatives have suggested a price increase of Rs 1,500 per tonne to account for the fall in the rupee, it remains unclear if the government will allow this change.
Political Implications and the Government’s Priorities
The government is likely to face political pressures regarding any increase in fertilizer prices. However, political costs might be minimized this year, as only Delhi and Bihar are scheduled to hold Assembly elections, and both are not major agricultural states. Additionally, the current consumption season for DAP has nearly concluded, as the rabi crop sowing period, which started in October, is almost over. This means any price adjustments would likely not be felt until the next kharif season, which begins in June-July 2025.
The central government’s most immediate priority is to ensure adequate fertilizer supplies for the upcoming kharif season. As of mid-December 2024, stocks of DAP and complex fertilizers were reported at 9.2 lakh tonnes and 23.7 lakh tonnes, respectively, both below the corresponding stock levels from the previous year. The government is already facing difficulties in meeting demand, and without sufficient imports in the coming months, India could face fertilizer shortages that may impact crop production.
Future Outlook and Potential Challenges
While the extended subsidy will likely provide some short-term relief to farmers, the challenges faced by fertilizer companies cannot be ignored. With fertilizer stocks falling below expected levels and import costs rising due to the weakening rupee, the industry is calling for more sustainable solutions. Whether the government will be able to balance the need to support farmers while ensuring the viability of fertilizer imports remains to be seen.
In the coming months, the focus will shift to ensuring adequate supplies for the next crop cycle and addressing the growing costs associated with fertilizer imports. The government’s response to these issues will be crucial for the long-term stability of India’s agricultural sector.
