The government’s fertiliser subsidy bill could increase by ~Rs 40,000 crore this fiscal from the already-announced allocation of Rs 2.15 lakh crore because of continued surge in the prices of pooled natural gas¹, the key raw material for manufacturing urea.

Any delay in increased allocation and disbursement would lead to higher working capital requirement and moderate the credit metrics of fertiliser makers.

The government has been proactive in addressing the subsidy requirements of the industry. In addition to Rs 1.05 lakh crore approved in the Union Budget for this fiscal, an additional subsidy of Rs 1.10 lakh crore was announced in May 2022 to offset surging feedstock and product prices. While this seemed sufficient to meet this fiscal’s requirements, continued surge in the price of gas has necessitated further subsidy.

The retail selling price of urea is fixed by the government. It is kept as low as 85% below the market prices to encourage farmers to use fertilisers for better crop yield. Urea makers are compensated through subsidy payments.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “Amid the Russia-Ukraine conflict, the price of pooled gas has risen ~10% quarter-on-quarter in September 2022². The earlier expectation was prices would soften gradually. Each dollar’s increase in the price of pooled gas raises the government’s subsidy burden by Rs 7,000 crore on domestically produced urea, which accounts for 85% of the production volume. The price of imported urea, which accounts for the balance 15% volume, remains elevated at over ~$650 per MT (metric tonne), almost double the historical levels. Together, this could mean overall subsidies rising to Rs 2.55 lakh crore this fiscal.”

Notably, this estimate has not factored any revision in the nutrient-based subsidy (NBS) rates for the second half of this fiscal, which comprises the rabi season. For non-urea fertiliser makers³, the government pays subsidy as per the NBS rates, which are reviewed in April and October every year.

While prices of phosphoric acid and rock phosphate, key ingredients for non-urea fertilisers, have risen 12% and 37%, respectively, in the six months through September 2022, NBS rates were hiked steeply in the first half of this fiscal. Given that prices of these two feedstocks remain high, NBS rates for the second half would bear watching.

Over the past two fiscals, timely disbursements of subsidy have significantly improved the credit profile of fertiliser makers. Any build-up of such dues would moderate their credit metrics. Assuming no additional subsidies, the industry interest coverage ratio could moderate to ~6.8x this fiscal from ~8.2 times last fiscal. That would still be comfortable compared with ~5.6x seen in fiscal 2021.

Says Joanne Gonsalves, Team Leader, CRISIL Ratings, “With the uptrend in input prices, the current budget allocated could get exhausted in the next 1-2 months. The sector is already seeing a build-up in receivables and therefore, higher working capital debt. Subsidy receivables have more than doubled in August 2022 from around Rs 14,000 crore in March 2022, indicates an analysis of the CRISIL-rated manufacturers⁴. Hence, increased government allocation and timely disbursement are crucial.”

¹ Computed as a weighted average of domestic gas and imported liquefied natural gas in the ratio of 25:75
² Pool gas prices have increased from average $22/mmbtu as of June 2022 to around $25/mmbtu in September 2022
³ Non-urea fertilisers: Nitrogen, phosphorous and potassium (NPK), di-ammonium phosphate (DAP), and muriate of potash (MOP)
⁴ Accounts for 55% of India’s fertiliser sales