The crisis in Ukraine following invasion by Russia has sent shock waves through out the world economy. In India, even as the steep rise in energy import bill will affect almost all sectors of the economy, the impact on fertilizers will be more pronounced. At the outset, let us capture a few relevant facts.
Despite prognostications by successive governments during the last four decades or so that India would become self-reliant in fertilizer availability and putting in place policies (in particular pricing and subsidy policies) aimed at achieving the goal, even today, the country remains preponderantly dependent on imports for meeting the requirements of its farmers.
Three most popular fertilizers used by farmers are urea, di-ammonium phosphate (DAP) and muriate of potash (MOP) being the major source of ‘nitrogen’, ‘phosphate’ and ‘potash’ nutrient respectively. Natural gas (NG) is the raw material (a more apt phrase is feedstock/fuel) used for manufacture of urea whereas phosphoric acid and ammonia are the prime raw materials (RMs) needed for making DAP.
In case of DAP, nearly 50 percent of India’s requirement is sourced from other countries whereas all of MOP needed by farmers is imported. All of phosphoric acid and bulk of ammonia required is imported. Coming to urea, 1/3rd of the requirement is imported. Even for the balance 2/3rd produced domestically, India depends on import of natural gas (it comes as liquefied natural gas or LNG) to the extent of 1/3rd . This is when fertilizer gets priority in allocation of domestic gas (supplied at ‘low’ administered/subsidized price) next only to household consumption and use in transportation. If, this priority goes, dependence on LNG import will go up.
What role do the countries involved in the conflagration viz. (i) Russia – the prime aggressor; (ii) Belarus (bordering to Russia’s north, it is extending full support to the latter and may be branded as the co-aggressor) and (iii) Ukraine, the country under attack, play in meeting India’s requirements?
Russia accounts for nearly 23 percent of the world supplies of ammonia and potash each. Together with Belarus – the other major supplier of potash (20 percent), this region supplies 43 percent to world potash pool. Russia alone makes up for 14 percent of world urea supplies whereas in DAP, its contribution is around 10 percent.
In energy, Russia is a domineering player. It is the world’s second-largest producer of NG with a share of 10 percent. In total world export of gas, its contribution is even higher at 25 percent. The EU countries draw 40 percent of their gas supplies from Russia. Russia is the third-largest producer of oil worldwide, accounting for over 12 percent of global crude production.
Coming to India, whereas in potash it draws close to 50 percent of its requirement from Russia and Belarus, a good slice of ammonia also comes from this region. Nearly 60 percent of Indian DAP demand is met from China and Saudi Arabia. In case of urea, over 1/3rd of import come from China, bulk of the remaining 2/3rd coming from countries in the middle-east. With regard to gas, India’s supply sources are fairly diversified including 10 percent from Russia.
In view of the raging war, there will be huge disruption in supplies from the region due to a deadly cocktail of factors such as (i) economic and financial sanctions imposed by countries of Europe and the USA, (ii) physical incapacitation in the entire supply chain from mining to production to logistics and movement (albeit road) and (iii) clogging of sea transportation route even as the Black Sea is now host to the warships – primarily Russian.
The EU and USA may have exempted energy supplies from sanctions for now (this is ostensibly to secure their own supplies), other obstructions e.g. the prohibition on Russian banks from having access to SWIFT (Society for Worldwide Interbank Financial Telecommunication) payment system will ensure that supplies particularly to other not so privileged countries remain disrupted.
The supply disruptions are inevitable for a minimum of 3-4 months; this is even under a most optimistic scenario of an ‘immediate’ resolution of the crisis. Under a realistic scenario, the disruption will continue till the end of 2022. In case however, the war zone expands with NATO (North Atlantic Treaty Organization) countries also getting directly entangled, the dastardly consequences will be with us for several years, perhaps even decades.
For India, these disruptions will manifest in the form of both supply shortages as well as steep increase in the import bill. The maximum impact will be felt in potash wherein we draw 50 percent of requirement from Russia and Belarus (already, a Belarusian potash miner has declared force majeure courtesy, US sanctions). Even in areas where our dependence on this region is less, India will have to pay more as with drastic cut in supplies from there, there will be global shortages and resultant steep increase in international prices.
What will be the impact on fertilizer sector in India?
Had there been a free market scenario, the industry would have come under serious stress and farmers made to pay higher price. But, that is not to be as fertilizers are under control. For decades, the Union government has run a system of controlling their maximum retail price (MRP) at a low level unrelated to the cost production/import and distribution and reimbursing the difference to the manufacturer/importer as subsidy from the budget. This mechanism shields both the farmers and the industry from any cost hike.
During 2021-22 also, the prices of almost all fertilizers and RMs had increased leaps and bounds. The price of DAP more than doubled while, price of urea and MOP went up almost three times each. Then, an overarching factor was hike increase in energy cost (courtesy, post-pandemic recovery) which forced major exporters to increase fertilizer prices. The resultant increase in cost was reimbursed to manufacturers by hike in subsidy by providing Rs 60,000 crore over and above the budget provision of Rs 80,000 crore.
For 2022-23, the Finance Minister, Nirmala Sitharaman has reduced allocation for fertilizer subsidy to Rs 105,000 crore against Rs 140,000 crore spent during 2021-22. This was in the hope that the prices would decline from the elevated levels of current FY. But, in view of the Ukraine crisis, these calculations have gone haywire. Even as fertilizer prices will increase further, the price of imported LNG has already zoomed to US$ 40 per million Btu (up from US$20 per mBtu during 2021-22).
It is very likely that the government will increase the allocation to at least Rs 150,000 crore or even higher depending on the extent of cost push. Prima facie, a fiscal deficit (FD) target at 6.4 percent or Rs 16,60,000 crore provides enough cushion to pay for the inflated subsidy bill. However, supply shortages are not ruled out if India is unable to procure required quantities.
A bigger issue is: FD cushion won’t be available eternally.
Even as per relaxed fiscal trajectory laid down by FM in 2021-22 budget, the government has to glide down to 4.5 percent by 2025-26. This requires reining in subsidies which will be possible only when India reduces its dependence on import. That is where little was achieved in the past and there is nothing on the horizon to instill confidence that things will look better.