Saturday, April 9, 2011

Fertilizer subsidy rates go up (again)!

It has come faster than expected. I had blogged just yesterday about the inevitability of the revision in fertilizer subsidies for 2011-12 in view of the rising import prices. The Businessline reports,

"An inter-Ministerial panel under the Secretary, Department of Fertilisers, is learnt to have approved higher import parity prices of $612 a tonne for DAP and $420 a tonne for MOP, as against the existing levels of $580 and $390. These upward revisions would translate into increased NBS rates for phosphorus (P) and potash (K). Currently, the NBS rate on P, linked to a $580-a-tonne reference price for imported DAP, is Rs 29.407 a kg. On the proposed $612-benchmark price, it will go up to around Rs 31 a kg. Likewise, the NBS rate on K will rise from Rs 24.628 to Rs 26.5 a kg with the assumed landed price being raised to $420 a tonne."

Interestingly, even if the NBS rate on P is increased to Rs 31, the resulting higher subsidy of Rs 19,220 or so on DAP would take the gross realisation to Rs 29,970 a tonne, leaving the farmer to still pay the gap of Rs 600-700 a tonne. The report also says that the MOP prices are currently quoting at $520 a tonne, far higher than the proposed revised import parity price of $420 a tonne, leaving the farmer to again absorb the losses. Further, there will be no buffer available to cushion against future price increases, which is inevitable given the global petroleum price trends.

Two important market expectations are getting anchored here. The domestic wholesalers and retailers realize that there is nothing sacrosanct about the once a year subsidy fixation announcement. They have the incentive to raise the MRP to cover the full subsidy instead of raising the MRP based on the import prices. As I had blogged earlier, given its size, India's procurement decisions and import parity price signals will quickly get embedded into the global market prices. So what is the way out?

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