The Centre’s fertiliser subsidy bill may be budgeted at Rs 1.3 lakh crore for the next financial year (2022-23), signalling its potential to be a relentlessly rising and sticky item on the revenue expenditure side. This is even as the fuel subsidies have been reined in and are set to be nearly eliminated in the current fiscal itself.

It would be the third year in a row in 2022-23 that the annual budget spending on fertiliser subsidy hovers around Rs 1.3 lakh crore from a lower range of about Rs 70,000-80,000 crore for a few years in the past. The subsidy bill rose 57% on year to Rs 1.27 lakh crore in FY21 as the government cleared arrears of about Rs 65,000 crore as part of the Covid-related packages. The surge in the international prices of fertilisers, as well as key ingredients, is estimated to inflate the subsidy on fertilisers to Rs 1.38 lakh crore in FY22, up 73% from the budget estimate (BE) of Rs 79,530 crore.

With Covid-19 persisting and the government not keen to antagonise farmers, prices won’t be allowed to rise in decontrolled phosphatic and potassic (P&K) fertilisers, including di-ammonium phosphate (DAP) in FY23 as well, an official aware of the matter told FE. “To address DAP shortage, fertiliser companies have been asked to make necessary arrangements for timely imports to avoid shortages or chaos in the market. Subject to price movement, subsidy outgo next year could be around Rs 1.3 lakh crore,” the official said.

Urea is provided to all the farmers across the country at a statutorily notified maximum retail price of Rs 242/per 45 kg bag (exclusive of charges towards neem coating and taxes as applicable) with effect from March 1, 2018. The phosphatic and potassic (P&K) fertilisers, including DAP are, however, largely decontrolled with a fixed subsidy element and are covered under a nutrient-based subsidy (NBS) scheme. In the wake of the volatility in prices in the international markets, the NBS subsidy rates have increased from `10,231/MT in April 2021 to Rs 24,231/MT in May and to around Rs 33,000 by October.

The surge in fertiliser subsidy has been triggered by rising global rates. The prices of urea, the most commonly used fertiliser, tripled to about $990/tonne while DAP price has more than doubled to $700-800 per tonne compared with the level one-and-a-half year ago. Now, rising input costs are causing further pressure on the prices. Crisil Ratings expects the price of natural gas — the feedstock that accounts for 75-80% of the total cost of production of urea plants – to rise by over 50% on year this fiscal.

For P&K fertilisers, India is 90% import-dependent.

The Centre’s plan to save on fertiliser subsidy through direct benefit transfer (DBT) has also been put on the back burner for now. Prolonged protests by farmers forcing the withdrawal of three laws and the impending assembly elections in five states, including the politically decisive Uttar Pradesh in 2022, have weighed on the mind of the policymakers. The government was keen to roll out DBT to plug pilferage, which could have helped in the reduction of subsidies.