Analysis of the news:

About Fertilizer subsidy in India

• It is financial support provided by the government to make fertilizers affordable for farmers, especially small and marginal ones.
• Fertilizers are essential for enhancing agricultural productivity, but they are costly, so the subsidy helps to reduce the financial burden on farmers.
• The Union Budget for 2024 allocated Rs 164,000 crore for fertilizer subsidy.

Extension of Subsidy on Di-Ammonium Phosphate (DAP)

• The Centre has extended the special subsidy of ₹3,500 per tonne on DAP for one more year starting January 1, 2025.
• Initially set to expire on December 31, 2024, this decision aims to curb farmgate price hikes for India’s second most-used fertiliser.
• This move is particularly significant given the rupee’s depreciation against the US dollar, which adds to cost pressures.

Impact of Fixed Maximum Retail Prices (MRPs)

• Despite DAP and other non-urea fertilisers being decontrolled on paper, the government has informally capped MRPs to shield farmers from price shocks.
• The MRP for DAP remains at ₹1,350 per 50-kg bag, while similar price caps exist for other fertilisers like 20:20:0:13 and muriate of potash.
• However, the steep fall in the rupee, coupled with rising import costs, has made it challenging for fertiliser companies to sustain these price caps.

Economic Pressures on Fertiliser Companies

• The current landed cost of imported DAP stands at ₹54,160 per tonne, significantly higher than the ₹52,960 per tonne recorded three months ago.
• Factoring in additional costs like customs duties, port handling, and dealer margins, the total cost exceeds ₹65,000 per tonne.
• In contrast, the combined government subsidy and MRP yield ₹52,411 per tonne, leaving a considerable gap that makes imports financially unviable without further government intervention.

Government Compensation and Fiscal Cost

• To mitigate industry losses, the government approved full compensation for DAP imports priced above $559.71 per tonne from September 1, 2024, to March 31, 2025.
• However, the subsidy scheme’s effectiveness has been undermined by the rupee’s plunge to ₹85.7-to-the-dollar.
• Extending the ₹3,500 per tonne subsidy reduces the potential fiscal cost, estimated at ₹6,475 crore, and limits the required MRP hike for companies.

Challenges in Fertiliser Availability

• Stock levels of DAP and complex fertilisers, as of mid-December, are lower than last year’s levels.
• The government must ensure sufficient imports of both finished products and raw materials to avoid shortages in the next kharif season.
• Failure to secure adequate supplies could disrupt agricultural productivity.

In conclusion, while the subsidy extension alleviates some immediate pressures, long-term challenges like exchange rate volatility, import viability, and stock replenishment remain critical for stabilising the fertiliser sector.

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