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The subsidy outgo for fertilisers would go up by ₹1,000-1,100 crore during the second half of the current financial year on account of higher domestic gas prices, rating agency ICRA said on Wednesday.
The demand of fertilisers is expected to grow only by a modest 2 to 4 per cent as a weaker monsoon and low reservoir levels could impact sowing in the rabi season, according to K Ravichandran, who heads corporate ratings at ICRA.
“The recent revision in domestic gas prices will lead to an increase of approximately $0.35 per mmbtu (million British Thermal Units) in the pooled gas price for the fertiliser sector for the second half of financial year 2018. The cost of production for the fertiliser sector should increase in the second half of financial year 2018 owing to higher pooled gas prices, coupled with the recent depreciation of the rupee against the US dollar,” Ravichandran said in a release.
According to him, fertilisers sales increased by 5 per cent during the first five months of the current fiscal, thanks to early monsoon showers and low inventories at the beginning of the season. But urea fertiliser witnessed a tepid 2 per cent growth primarily because of the introduction of neem-coated urea, which curbed marketing and improved nutrient efficiency.
However, the growth may turn modest in the second half due to the weakening of monsoon towards the end of the current kharif season, Ravichandran said.
Though the rise in gas prices would lead to an increase in working capital borrowings, resulting in higher interest costs, reimbursement of energy savings at higher gas prices would more than offset this additional burden at least for efficient players in the industry.
The working capital borrowings are expected to remain elevated as the subsidy allocation for the fertiliser sector has been fixed at ₹70,000 crore for the next three years, the ICRA release said.
The government had recently announced an increase in the dealer margins for urea dealers to nearly ₹400/mt from around ₹180-200/mt as the workload would go up after the implementation of direct benefit transfer (DBT) in the fertiliser sector.
The increase in dealer margins will be equally shared by the Central government and the industry which will lead to an increase of around ₹300 crore in the government subsidy, while the incentive on neem coating for the industry would reduce from 5 per cent to 3 per cent of urea MRP.
Last month, the government announced a new deadline of March 31, 2018 for rolling out DBT scheme.
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