Lower gas price to boost fertilizer subsidy savings

Falling gas prices are likely to help the government keep subsidy for urea below the original estimate of Rs51,000 crore for 2016-17


Softer gas prices translate into cheaper urea imports, which meet nearly a third of the country’s 27 million tonne urea requirement. Photo: Reuters
Softer gas prices translate into cheaper urea imports, which meet nearly a third of the country’s 27 million tonne urea requirement. Photo: Reuters

New Delhi: Depressed commodity prices in world markets are continuing to aid the exchequer.

The softer natural gas prices in world markets are likely to help the government keep the subsidy for the most commonly used fertilizer, urea, well below the original estimate of Rs.51,000 crore for 2016-17.

The softer prices of gas are benefiting the exchequer in two ways. Firstly, they help lower the cost of domestic urea production using locally available gas, the price of which is administered as per global trends. Secondly, they make for cheaper urea imports, which meet nearly a third of the country’s 27 million tonne urea requirement.

A 20% cut in the price of domestically produced natural gas expected for the October-March period of 2016-17 alone is expected to immediately lower the cost of locally made urea using domestic gas by around Rs.3,200 a tonne or by Rs.3,600 crore.

Gas accounts for 80% of the production cost of urea. About 60% of the gas requirement of Indian producers is met by domestic gas and the rest by imported liquefied natural gas (LNG).

Global trend (based on prices of gas in the surplus economies of the US, Canada and Russia with a lag of three months) warrants a cut in the domestic gas price to about $2.45-2.50 a unit from the prevailing $3.06 a unit, according to an official in the oil ministry, who asked not to be named.

The government had earlier reduced domestic gas price from $4.6 per million British thermal unit (mmBtu) to $3.82 for the first half of this fiscal.

It had also got the price of imported gas from Qatar, which accounts for roughly three-fourths of the imports, lowered in a renegotiation last December. These two together were earlier estimated by producers to account for about Rs.9,000 crore in subsidy savings for the current year.

Savings on the direct import of urea, for which a Rs.11,000 crore subsidy has been earmarked in this year’s budget, would be in addition to this. Imports have been becoming cheaper by the month, dropping from Rs.13,600 a tonne in March to Rs.11,800 a tonne in July, as per commodity market data providers.

(The subsidy allocated for domestic production is Rs.38,000 crore and for freight it is Rs.2000 crore, taking the total meant for the commodity to Rs.51,000 crore.)

“The subsidy outgo on fertilizer will be lower than originally budgeted at the beginning of the year. There is not much change in the level of consumption of the commodity by farmers compared to a year ago,” said Birinder Singh, executive director, Indian Farmers Fertilizer Cooperative Ltd. Actual subsidy outgo from the exchequer is a function of the subsidy per tonne and total consumption.

Fertilizer is one of three major items the government subsidises along with food and petroleum. These together account for about Rs.2.3 trillion or 1.5% of gross domestic product for FY17.

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