Fertiliser Subsidy Expected To Fall Short As Gas Prices Rise
If the government doesn't increase its subsidy, the receivables of fertiliser companies are expected to rise.
Government’s fertiliser subsidy may fall short of supporting manufacturers impacted by rising prices of natural gas, a key input component, according to economists.
The elevated gas prices would put an additional burden of Rs 40,000 crore on the government exchequer, according to a Crisil Ratings report.
Naveen Vaidyanathan, director at Crisil Ratings told BQ Prime that the government has so far been 'proactive' even though gas prices have remained higher for longer than expected. He estimates the subsidy requirement for the entire fiscal to rise to Rs 2.55 lakh crore.
"With Rs 2.15 lakh crore already announced, an incremental shortfall of Rs 40,000 can be expected, if the current gas price outlook persists," he said.
What's Pushing Up Gas Prices?
Globally, prices of natural gas have remained elevated throughout this fiscal as the war across the black sea enters its ninth month. This has become a cause of concern for India, as according to the Petroleum Planning and Analysis Cell. The country imports 45-50% of its gas consumption needs.
The prices of pooled gas rose 10% quarter-on-quarter in September amid Russian's war in Ukraine, the Crisil report said.
Pooled gas includes domestically produced natural gas and imported liquified natural gas. To create a uniform rate for fertiliser industry, the price of domestic natural gas is weighted averaged or pooled with the cost of imported liquified natural gas.
In India, according to Vaidyanathan, the ratio has been set at 25:75 with imported LNG determining the price.
Adding to this, the government earlier this month increased the price of domestically produced gas to $8.57 per million British thermal unit from $6.1 per mmBtu as global energy prices surged.
Economists that BQ Prime spoke to said factors like the depreciating rupee, supply-chain disruptions, and rising input costs also pushing fertiliser manufacturing costs higher.
CARE Ratings Ltd., too, expects an additional fertiliser-subsidy burden of Rs 35,000 crore due to the impact of increasing domestic gas prices and rising input costs, including key chemicals.
Urea Manufacturers Worst Hit
The pinch on manufacturers is also expected to vary based on the kind of fertiliser they produce, according to Hardik Shah, director, CARE Ratings. "Urea fertilisers use natural gas as a feedstock in the manufacturing process, so the impact would be more on them," he told BQ Prime. This is because manufacturers use more natural gas in their process and are also tied down by the government-mandated subsidy for urea fertiliser, he said.
Therefore, a rise in gas prices too would increase the dependence on additional subsidy payout, Shah said. With the lack of pricing flexibility, manufacturers remain more dependent on the government subsidy to make up for rising input costs, he said.
"[For] Each dollar increase in the price of pooled gas, the government’s subsidy burden rises by Rs 7,000 crore on domestically produced urea, which accounts for 85% of the production volume," Vaidyanathan of Crisil Ratings said.
According to his estimate, the price of imported urea, which accounts for the balance 15% volume, remains elevated at over $650 per metric tonnes. This is almost double the historical levels, leading to overall subsidies rising to Rs 2.55 lakh crore this fiscal, he said.
Outlook
The government is likely to continue increasing its subsidy allocation in line with rising costs, according to Shah of CARE Ratings.
"Fertiliser subsidy has risen this year to Rs 2.15 lakh crore already, and the government has expressed intent to further enhance the subsidy budget for the upcoming Rabi season in case input costs remain elevated," Shah said.
If the government doesn't increase its fertiliser subsidy, the receivables of fertiliser companies are expected to rise in the latter half of this year, hurting the credit profile of the manufacturers and the sector at large.
Higher subsidies, which currently stands at over Rs 3.4 lakh crore this fiscal, could also impact the government's glide path to maintaining a fiscal deficit of 6.4% of GDP.