India is considering a proposal to raise the price of urea, the fertilizer most used by its farmers, by at least 10 percent in order to contain huge subsidy costs that are straining the budget, government and industry officials told Reuters.
Fertilizers Minister Ananth Kumar has backed the measure, sources said, bolstering its chances of being implemented. Two options are under consideration; either the price hike could be included in the budget in July or it could be approved by the cabinet, the sources said.
The first major price hike in four years would mark an important step by Prime Minister Narendra Modi's new government toward cutting wasteful use of urea and easing fiscal pressures resulting from a weak economy.
It would boost the relative appeal of potash and phosphate fertilizers that India imports in bulk from North America and the former Soviet Union, and whose domestic selling prices have been allowed to rise since 2010.
But the measure could also put upward pressure on food prices, compounding concerns that a sub-par monsoon could hit this year's summer crops. The government on Monday declared fighting food price inflation its top priority.
"A two to three percent rise in urea prices won't make any meaningful difference in subsidy allocation. We are pitching for at least a 10 percent hike," said one government official who requested anonymity.
Shares of fertilizer companies jumped on the news as the move will relieve pressure on margins. Chambal Fertilizers and Chemicals gained 8 percent and Rashtriya Chemicals and Fertilizers Ltd surged as much as 9.1 percent.
Among beneficiaries of reduced Indian urea subsidies could be Canada's Potash Corp of Saskatchewan, U.S. Mosaic Co and Russia's Uralkali.
Subsidy Costs Quadruple
Fertilizer subsidy costs have quadrupled over the past 10 years as the previous government kept urea prices below the cost of production, fearing a backlash from the powerful farm lobby.
A proposed doubling of natural gas prices may now force the government's hand. Gas accounts for four-fifths of the cost of making urea, a nitrogenous fertilizer that consumes more than half of India's $11 billion annual fertilizer subsidy bill.
"The gas price rise is making the urea price hike a compulsion. The government has no choice. We are expecting a decision before the budget or in the budget," said a senior official with a state-run fertilizer company.
India last year approved a hefty rise in gas prices to more than $8 per million British thermal units in a bid to boost returns for local energy producers, spur investment and ease acute power shortages.
Modi will have the final say on a proposal to implement the natural gas price hike from July 1. The gas price increase was put on hold during the recent election, which Modi's Bharatiya Janata Party (BJP) won by a landslide.
A spokesman for the Ministry of Chemicals and Fertilizers declined to comment.
The Farm Ministry is not responsible for urea prices, but a senior official cautioned that any rise would lead farmers to demand higher minimum support prices for their crops.
Finance Minister Arun Jaitley has pledged to uphold fiscal discipline, and in his first budget will have to strike a balance between unwinding subsidies and capping inflation.
India's longest slowdown since the 1980s is putting upward pressure on the 2014/15 fiscal deficit target of 4.1 percent of gross domestic product that Jaitley inherited from the previous government.
The planned gas price hike would increase annual urea output costs by 100 billion rupees ($1.7 billion), according to Satish Chander, director general of the Fertiliser Association of India (FAI).
The previous government allocated 679.7 billion rupees to fertilizer subsidies for this fiscal year. The FAI, however, estimates costs will reach 1 trillion rupees, in part due to payments carried over from last year.
"Following the gas price hike, urea prices need to be raised by 40 to 50 percent. The government can't do it in one go. A 10 percent rise would be a good start," said an official at a state-run fertilizer company.
The urea price has risen just 16.5 percent since 2000 to 5,360 Indian rupees ($91) per tonne, while prices of other crop nutrients like diammonium phosphate (DAP) have nearly tripled and muriate of potash (MoP) has quadrupled. The growing price gap has led farmers to use urea indiscriminately, industry executives said.
India's annual urea consumption has jumped by half to 30 million tonnes over the past decade. It produces 22 million tonnes of urea a year and has to import 8 million tonnes to meet demand, the FAI estimates.
"It has been kept almost flat for last 10-15 years. The time has come (for) a rational, step-by-step process of increasing prices," said R. Mukundan, managing director at Tata Chemicals.