Gas price hike to set off farm or food subsidy dilemma

MUMBAI: Government of India’s plan to double gas prices from April threatens to hit its efforts to cut fiscal deficit, as higher production costs for the country’s most widely used fertiliser force authorities to raise either farm or food subsidies.
The unwanted side-effect highlights the difficulties the world’s second-most populous nation faces introducing market-oriented reforms needed to kick-start the economy, while keeping spending in check.
Govt last year approved a hefty rise in gas prices to around $8.40 per million British thermal units in a bid to boost returns for local producers, spur investment in the industry and ease acute power shortages.
Gas accounts for nearly 80% of the production cost of urea, a nitrogenous fertiliser that consumes more than half of the $11 billion India spends each year subsidising farmers for selling fertilisers at below the cost of production.
“The gas price hike will increase the annual urea production cost by Rs 100 billion,” said Satish Chander, director-general, Fertiliser Association of India (FAI). Urea prices are set by the government, which has said any increase in the cost of production would be met through a higher subsidy for manufacturers. A less politically palatable alternative would be to allow manufacturers to pass on the costs through higher prices.
India consumes about 30 million tonnes a year of urea, with local producers supplying 22 million tonnes and the rest imported, FAI estimates.
Fearing a backlash from the politically influential farm block, the government has already held urea prices well below those of alternative potash and phosphate-based fertilisers whose producers have been allowed to raise prices since 2010. The fertiliser subsidy bill has tripled in the past seven years. The government has allocated Rs 67,970 crore in 2014/15, but Chander says the figures stands well short of what’s needed given the impact of the gas price hike.
In a bid to avoid a potential ratings downgrade, Asia’s third-largest economy aims to cut its fiscal deficit to 4.1% of GDP in 2014/15 by lowering fuel and fertiliser subsidies.
But even allowing the urea price to rise is unlikely to trim the government’s subsidy burden, analysts say.
Instead it will simply shift the onus from the Ministry of Chemicals and Fertilizers to the Ministry of Consumer Affairs, Food and Public Distribution.