Increased subsidy on DAP

Source: By Parthasarathi Biswas: The Indian Express

Faced with a possible revival of farmer protests — this time over fertiliser prices — the Narendra Modi government on 19 May 2021 announced a 140% increase in the subsidy on di-ammonium phosphate (DAP), from Rs 511 to Rs 1,200 per 50-kg bag. What were the economic and political compulsions behind the government’s move, which, it is estimated, will cost the exchequer an additional Rs 14,775 crore in the coming kharif season alone?

DAP is the second most commonly used fertiliser in India after urea. Farmers normally apply this fertiliser just before or at the beginning of sowing, as it is high in phosphorus that stimulates root development. Without well-developed roots, plants will not grow to their normal size, or will take too long to mature.

While there are other phosphatic fertilisers as well — for instance, single super phosphate that contains 16% P and 11% sulphur (S) — DAP is the preferred source of P for farmers. This is similar to urea, which is their preferred nitrogenous fertiliser containing 46% N.

The maximum retail price (MRP) of urea is currently fixed at Rs 5,378 per tonne or Rs 242 for a 45-kg bag. Since companies are required to sell at this rate, the subsidy (the difference between the cost of manufacturing or import and the fixed MRP) is variable.

The MRPs of all other fertilisers, by contrast, are decontrolled. Technically, companies can sell these at the rates that they — and not the government — decide. The government only gives a fixed per-tonne subsidy. In other words, the subsidy is fixed, but MRP is variable.

But do all non-urea fertilisers attract the same subsidy?

No, they are governed by what is called nutrient-based subsidy or NBS. For 2020-21, the Centre fixed the NBS rates at Rs 18.789/kg for N, Rs 14.888/kg for P, Rs 10.116/kg for potassium (K) and Rs 2.374/kg for S.

Therefore, depending on the nutrient content for different fertilisers, the per-tonne subsidy also varies. Since one tonne of DAP contains 460 kg (46%) of P and 180 kg (18%) of N, the subsidy comes to Rs 6,848.48 plus 3,382.02, or Rs 10,231. Likewise, the subsidy on muriate of potash (60% K) is Rs 6,070 per tonne, while it is Rs 2,643/tonne for SSP and Rs 8,380/tonne for the popular ‘10:26:26’ NPK fertiliser.

As already noted, the subsidy on DAP for 2020-21 was Rs 10,231 per tonne, or Rs 511.50 for a 50-kg bag. Most companies, till recently, were selling DAP to farmers at around Rs 24,000 per tonne or Rs 1,200/bag. They could do this when international prices — both of the final product as well as the imported raw materials/ingredients such as rock phosphate, sulphur, phosphoric acid, and ammonia — were at reasonable levels.

Landed prices of DAP in India were below $400 per tonne or Rs 29,000 till October. Adding 5% customs duty and another Rs 3,000 towards port handling, bagging, warehousing, interest, trade margins, and other costs took it to around Rs 33,500 per tonne. Netting out the subsidy of Rs 10,231 per tonne, companies could manage to sell at the MRP of Rs 24,000/tonne or Rs 1,200/bag.

But global prices of fertilisers and inputs have surged over the past 6-7 months, tracking a general bull run in commodities. Since October, the average import (CFR) prices of DAP have risen from $395 to $570/tonne, while similarly shooting up from $275 to $365 for urea, $230 to $280 for MOP, $280 to $550 for ammonia, and $85 to $210 for sulphur. That has made it unviable for companies to continue selling at the old rates.

So, what did they do?

All of them raised MRPs. That included the country’s biggest seller, Indian Farmers Fertiliser Cooperative (Iffco), which announced a hike in its MRP of DAP from Rs 1,200 to Rs 1,900/bag, while also doing the same for 10:26:26 (Rs 1,175 to Rs 1,775/bag), 12:32:16 (Rs 1,185 to Rs 1,800/bag), and 20:20:0:13 NPKS (Rs 925 to Rs 1,350/bag).

These hikes were effective from 1 April 2021. Since non-urea fertilisers are technically decontrolled, there was nothing stopping them from undertaking such steep price hikes. But with West Bengal Assembly elections still on, the companies were told to keep these on hold. Iffco, for one, declared that the higher MRPs will be only for newly produced/imported fertilisers. The old stocks would continue to be sold at the earlier rates.

And what happened later?

As the old stocks started running out, the companies started selling the new material at the higher rates. April being a lean month for fertiliser sales, the extent of price increase did not really dawn upon anybody, farmers included. It was when purchases started picking up from around the second week of this month — ahead of the kharif planting season — that all hell broke loose.

The focus naturally fell on DAP; having to pay 58% more — an extra Rs 700/bag on top of Rs 15/litre for diesel in the last one year — was obviously too much. Nor could companies oblige the government not to increase MRPs beyond a point.

What has the government now done?

The Department of Fertilisers had notified the NBS rates for 2021-22 on 9 April 2021. These were kept unchanged from last year’s levels, leaving companies little choice but to go ahead with the MRP hikes.

But on 19 May 2021, Prime Minister Narendra Modi chaired a meeting where a detailed presentation was made to him on the global movements in fertiliser prices. Following the meeting, a “historic decision” was taken to increase the subsidy on DAP from the existing Rs 10,231 per tonne (Rs 511.55/bag) to Rs 24,231 per tonne (1,211.55/bag).

The Department of Fertilisers too has notified a higher NBS rate for P (from Rs 14.888 to Rs 45.323/kg), while keeping those for the other three nutrients (N, K and S) unchanged. This will enable companies to sell DAP at the earlier MRP, though not MOP and other complex fertilisers.

But the timing of keeping at least DAP prices in check is good, as farmers will start sowing operations from next month with the arrival of the southwest monsoon rains. Politically, too, a revival of farmer protests, more so during the time of the Covid’s second wave, is the last thing the government would want.