Lower gas price to help government save on fertilizer subsidy

The sharp decline in the price of domestic natural gas in the first half of the current fiscal will help the government save subsidy on urea by up to Rs9,000 crore


Finance minister Arun Jaitley proposes to limit government’s fiscal deficit down from 3.9% last year. Photo: Mint
Finance minister Arun Jaitley proposes to limit government’s fiscal deficit down from 3.9% last year. Photo: Mint

New Delhi: The sharp decline in the price of domestic natural gas in the first half of the current fiscal is likely to lead to a saving in the government’s subsidy outgo on urea, the most commonly used fertilizer, by up to Rs.9,000 crore in 2016-17.

According to official estimates, the 20% price cut on domestically produced gas to $3.06 per million metric British thermal unit (mmBtu) for the April-September period and the renegotiated price of imported liquefied natural gas (LNG) from Qatar’s RasGas Co. Ltd has reduced the price of pooled gas available to fertilizer factories by nearly a third to $6.2 a unit from a year ago. In 2015-16, the pooled price of gas for fertilizer companies was about $9 per unit.

Factories are given gas at a pooled price (of domestic and imported gas) from 1 July 2015 so that no factory is at a disadvantage. The idea is to ensure a level-playing field in fuel price as the government does not want the less advantaged factories to shut down leading to higher import dependence.

A further reduction expected in gas price for the second half of the fiscal could enhance the savings on subsidy for the domestically produced urea estimated for 2016-17 at Rs.38,000 crore. Natural gas price has a direct impact on the subsidy outgo as fuel cost accounts for 80% of the urea production cost.

“A reduction in gas price by $1 per mmBtu lowers the cost of urea production by $26 per tonne,” said Birinder Singh, executive director, Indian Farmers Fertilizer Cooperative Ltd. However, any change in the quantum of fertilizer used by farmers and exchange rate movements could also impact the actual subsidy outgo.

India produces 21 million tonne of urea and imports about six million tonnes. In the wake of the prevailing low gas price in world markets, finance minister Arun Jaitley had in 2016-17 budget lowered the subsidy for imported urea to Rs.11,000 crore from Rs.12,300 for the last fiscal. Companies sell the commodity at government set prices and get the subsidy based on their sales figures.

Subsidy on fertilizers, petroleum and food estimated at Rs.2.5 trillion for the current year account for about 12% of the government’s total expenditure and has a bearing on its fiscal consolidation performance. Jaitley proposes to limit government’s fiscal deficit—the gap between receipts and spending usually met through borrowings-to 3.5% of GDP this fiscal, down from 3.9% last year.

The prevailing low crude oil price in world markets has helped the finance minister to keep petrol and diesel out of price control, raise taxes on these fuels without increasing the burden on the consumer and focus on directly transferring subsidy on cooking fuel (liquefied petroleum gas) to the consumer’s bank account. An experiment to transfer kerosene subsidy directly to the consumer’s accounts in 26 districts across eight states are underway. Being a net importer of energy, India is one of the economies that has benefited from the low price of fossil fuels in world markets, although the stress on oil producing economies has impacted its foreign exchange remittances.

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