New fertilizer policy likely to push up subsidy bill considerably

India might have to spend more to subsidize fertilizer prices when a group of ministers meets on Thursday to consider a new policy that is likely to peg the subsidy to the international prices of key ingredients phosphorus and potassium, say industry watchers.
The government currently subsidizes fertilizer costs by fixing retail prices. It then pays manufacturers the difference between the sale and production prices, plus a reasonable profit. To arrive at this, the government looks at the actual cost of production while determining the price at which the producer sells to the government.
Under the new policy, which will replace one that expired on 31 March, the cabinet committee on economic affairs will discuss whether the government will reimburse producers for the use of phosphorus and potassium determined by global prices.
“The price of phosphorus, as calculated from the imported diammonium phosphate (DAP), will be the benchmark in this regard,” said a senior fertilizers department official who did not wish to be identified.
DAP, urea and muriate of potash, or MoP, are the three most widely used fertilizers in the country.
The cost of producing the phosphatic component of a fertilizer domestically would be linked to the international cost of production of phosphorus as calculated from imported DAP.
The MoP used in the country is entirely imported and the cost of production of potassium is likely to be linked to the cost of production of potassium in the imported MoP.
The Fertiliser Association of India, or FAI, the apex industry body, has been demanding that the government announce a policy, in the absence of which the industry does not know the producers’ price.
“Our basic demand is that the policy should allow us to not only cover our costs but also give some margin,” said FAI director Satish Chander.
“The cost-plus (expired) policy did not provide anyincentive to an efficient producer since all productivity gains were mopped up by the government.”
India’s fertilizer subsidy is likely to skyrocket to an estimated Rs95,000 crore in the year to March 2009, or 1.9% of the country’s gross domestic product, from Rs15,779 crore in the fiscal year 2004-05.
The department of fertilizers has also proposed subsidizing two new fertilizers—triplesuper phosphate (TSP) and ammonium sulphate.
Although these are now produced in negligible quantities, the government expects the production of TSP—a DAP substitute—will increase once it is subsidized.
The department official said presently only two plants in the country have the capacity to produce TSP—Fertilisers and Chemicals Travancore Ltd and Gujarat State Fertilizers and Chemicals Ltd.
The new policy is also likely to exclude the so-called outliers—those who managed to import at a price that is lower by $30 (Rs1,284) per tonne than the price at which the others import—while calculating the average import price. The government uses this average import price to arrive at the formula to compensate manufacturers.
In fiscal year to March, India produced 32.3 million tonnes (mt) of fertilizer and imported 14mt of it.