Battling fiscal deficit, India to cut fertilizer subsidy for FY14

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India plans to cut its fertilizer subsidy bill by at least 15 percent for the fiscal year 2013-14, four sources told Reuters, a move that takes advantage of a fall in international prices to help narrow the country's fiscal deficit.

Fertilizers, after oil and food, account for the third-biggest share of India's total subsidy bill, which is expected to rise to 2.4 percent of gross domestic product (GDP) in fiscal 2012/13.

The government had estimated the fertilizer subsidy at 609.7 billion rupees ($11.4 billion) for the fiscal year ending next month, but it is likely to be much higher than the target.

Based on the estimated subsidy level for 2012/13, a 15 percent cut would save the government nearly 91.5 billion rupees. Calculating from the projected fiscal deficit for this year, this would narrow the deficit by as much as 0.1-0.2 percentage point.

Finance Minister P. Chidambaram has staked his reputation on lowering the fiscal deficit to 5.3 percent of GDP to improve the investment climate following ratings agency threats to downgrade to junk India's sovereign debt if action was not taken.

Reuters reported exclusively last week that, after small steps to reduce fuel subsidies, Chidambaram is now putting welfare, defense and road projects on the chopping block in a last-ditch attempt to hit his deficit target by next month.

A senior official at the fertilizer ministry with direct knowledge of the plan said the subsidy bill would be reduced by at least 15 percent or more in the next financial year, though the actual cut will depend on the views of the agriculture and finance ministries.

"Since international prices have fallen, obviously, (the) subsidy will go down," Junior Fertilizer Minister Srikant Jena told Reuters separately, adding that a final decision on the extent of the cut was yet to be taken.

The move is unlikely to trigger opposition from farmers as the government plans to leave unchanged the subsidy for urea, the most-used fertilizer, an official with a Mumbai-based state-run fertilizer company said.

A senior official with the country's leading co-operative fertilizer company said most of the subsidy reduction would come from potash and phosphate-based fertilizers as import prices have gone down.

India imports all its potash and about 90 percent of its phosphate requirement.

India imported muriate of potash (MoP) at an average price of $490 a tonne in 2011/12, while prices of diammonium phosphate (DAP) hovered around $580 per tonne.

This week, India agreed to buy MoP at $427 a tonne for 2013/14 while global DAP prices have fallen to about $525 a tonne, giving the government much-needed leverage to cut subsidies without raising retail prices and angering farmers.

The state-run fertilizer company official said the government wants companies to lower retail prices of potash and phosphate, cushioning the impact of lower subsidies.

For the current fiscal year, India slashed subsidies for DAP by 27.4 percent from the previous year, while subsidies for MoP were cut by 10 percent. This forced fertilizer companies to raise retail prices, angering farmers, who cut consumption.

"Higher fertilizer prices and drought in some areas cut consumption this year. Consumption is unlikely to revive next year, if the government decides to cut subsidies further," said the fertilizer company official.

Weak fertilizer demand can hit the profitability of Indian firms such as Rashtriya Chemicals and Fertilizers, Tata Chemicals, National Fertilizers, GSFC , Coromandel International and Chambal Fertilizers and Chemicals.

It can also reduce India's DAP and MoP imports.

Potash Corp, Mosaic Co, Agrium Inc , Uralkali, Arab Potash Co, ICL Israel Chemicals and Germany's K+S AG are among the major potash suppliers to India.

Moroccan phosphate producer Office Cherifien des Phosphates (OCP), PhosChem and Russian fertilizer group Phosagro are key DAP supplier to India. ($1 = 53.2850 Indian rupees)


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