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The Indian government has decided to extend the special subsidy on Di-Ammonium Phosphate (DAP) fertilizer for another year, a decision aimed at stabilizing farmgate prices and addressing the challenges posed by the depreciation of the Indian rupee.

Key Government Decision

• Extension of Subsidy: The Centre has extended the Rs 3,500 per tonne special subsidy on DAP from January 1, 2025 to December 31, 2025.
• Objective: This extension aims to contain farmgate price surges of DAP, India’s second most-consumed fertilizer, which is being impacted by the fall in the rupee's value against the US dollar.

Fertilizer Price Dynamics and Impact

• MRP Caps on Fertilizers: Despite the decontrol of non-urea fertilizers, the government has frozen the maximum retail price (MRP) for these products.
  • Current MRPs:
    • DAP: Rs 1,350 per 50-kg bag
    • Complex fertilizers: Rs 1,300 to Rs 1,600 per 50-kg bag depending on composition.
• Subsidy on DAP: The subsidy includes Rs 21,911 per tonne on DAP, plus the Rs 3,500 one-time special package.
• Impact of Currency Depreciation:
  • The rupee's depreciation has made imported fertilizers significantly more expensive.
    • The landed price of DAP has increased from Rs 52,960 per tonne to Rs 54,160 due to the rupee falling from Rs 83.8 to Rs 85.7 against the dollar.
    • Including additional costs (customs, port handling, insurance, etc.), the total cost of imported DAP is now Rs 65,000 per tonne, making imports unviable without further subsidy or MRP adjustments.

Industry Concerns and Viability Issues

• Import Viability:
  • Fertilizer companies face significant cost pressures due to rising import prices and the current MRP caps.
  • Without an increase in government subsidies or approval to revise MRPs upwards, imports will be unviable.
  • Even with the extended subsidy, companies estimate a Rs 1,500 per tonne shortfall due to currency depreciation.
• Stock Levels and Supply Challenges:
  • Current stock levels for DAP (9.2 lakh tonnes) and complex fertilizers (23.7 lakh tonnes) are below last year's levels.
  • With inadequate imports, there are concerns about fertilizer supply for the upcoming kharif season (June-July 2025).

Government’s Strategy and Fiscal Implications

• Compensation for Imports:
  • In September 2024, the government approved compensation for DAP imports above a benchmark price of $559.71 per tonne, based on an exchange rate of Rs 83.23 to the dollar.
  • With the rupee falling below Rs 85.7, these previous compensation calculations have become outdated.
• Fiscal Impact:
  • The extended subsidy will cost the government an additional Rs 6,475 crore. Despite this, political implications of raising the MRP are minimal, as only non-major agricultural states are facing elections in 2025.

Future Outlook and Priorities

• Immediate Priority: The government’s primary concern is securing adequate fertilizer stocks for the kharif season, focusing on ensuring sufficient imports of both finished fertilizers and raw materials.
• Balancing Factors: The government will need to navigate the complex balance of maintaining fertilizer affordability for farmers, ensuring the viability of fertilizer companies, and managing fiscal constraints.

As the subsidy extension is implemented, all eyes will be on the government's ability to ensure a stable supply of fertilizers while safeguarding both farmer interests and economic sustainability in the face of an increasingly challenging exchange rate environment.