Despite the decline in international urea prices, the subsidy on urea is estimated to stay at Rs 36,000-40,000 crore in the current financial year, which is similar to previous years, due to the depreciation in the rupee.

While subsidy for P&K (phosphatic and potassic) fertilisers is likely to remain in the range of Rs 29,000-30,000 crore and is dependant on sales volumes, the subsidy for urea is variable and depends on currency fluctuations.

Energy or gas cost, which is the major cost in urea production, is denominated in $/mmbtu (one million british thermal units). The depreciation of the currency leads to increase in gas costs, which in turn increases the subsidy bill. The overall subsidy on fertilisers would be Rs 65,000-70,000 crore in 2013-14 (not including the carryover subsidy of an estimated Rs. 36000 crore), estimates made by ratings agency ICRA showed.

"Given the subsidy budget of Rs 66000 crore for 2013-14, the delays in subsidy payments are likely to continue," the agency said. Though the demand is expected to be better due to good monsoon rains, delayed subsidy payments would lead to stretched cash flows, elevated capital structures and adversely impact net profits of companies due to high interest costs, it said.

The sharp fall in the rupee in recent months has led to production costs for fertilisers remaining high despite lower global prices. Further, subsidy delays are likely to put pressure on cash flows of companies. The recent developments in the potash market may however be beneficial for India, ICRA said. The decline in the cost of procurement would significantly reduce retail prices of MOP (muriate of potash), which may lead to revival in demand, the agency said.

Any meaningful reform in urea pricing however is likely only after the general elections in 2014. Despite significant challenges in the form of currency depreciation, feedstock availability constraints with the gas allocation to the fertiliser sector being capped at existing levels as well as subsidy delays, the industry is on the path of slow but steady recovery, ICRA stated. The measures taken to control inventory levels and imports as well as healthy monsoons are aiding revival in demand, the agency said.



Keywords:international urea , rupee,phosphatic ,potassic fertilisers , currency , gas cost, ICRA , subsidy payments ,interest costs,global prices,potash market , urea pricing ,Business news