The federal government provides financial support for
domestic fertilizer sales at rates below the market to insulate farmers from
high prices and to contain inflation.
The government expects to cut its fertilizer subsidy bill by
up to 240 billion rupees if the fifth of companies' supplies is bought through
bilateral contracts or gas exchange, said one of the government officials, who
declined to be identified.
India, which imports up to 40% of the 50 million tons of fertilizer
annually, has been hit hard by rising prices after Russia's invasion of Ukraine
disrupted supplies. Russia is a major fertilizer producer.
Early last month, Fertilizers Minister Mansukh Mandaviya
said that due to higher global prices, India's fertilizer subsidy bill for the
fiscal year would rise to a record 2.25 trillion rupees from about 1.5 trillion
rupees the previous year.
"To help rein in the fertilizer subsidy bill for next
fiscal, the fertilizer ministry is trying to rework the mechanism of how gas is
procured by fertilizer plants," said a second government official, who
also declined to be identified.
Both of the officials are directly involved in the issue but
are not authorized to speak to media.
The
government has amended 2015 gas procurement guidelines under which fertilizer
plants had to procure 80% of their gas through long-term contracts, and the
balance through three-month tenders, they said.
"Three-month prices are high as there is lot of padding
and hedging by suppliers, more so since there is so much volatility in global gas
prices," the first official said.
Under the revision, fertilizer companies will have to buy
40% of their supplies under a "take or pay" rule, in contrast to no
minimum purchase required under the guidelines previously, the official added.
The "take and pay" rule led to shares of state-run
fertilizer companies, National Fertilizers Ltd, Rashtriya Chemicals and
Fertilizers Ltd, falling by 4% to 5% after the news, under performing the
broader index.
Fertilizer plants can source gas through the Indian Gas
Exchange and inter-company contracts. The new rule also allows fertilizer
companies to withdraw tenders if they feel the bidding has led to
higher-than-expected prices.
Fertilizer
plants bought gas at US$38 per million British thermal units (mmBtu) for supply
in the October-December quarter through a tender. The maximum price quoted in
the tender was US$55 while gas was available at the Indian Gas Exchange and
bilateral markets for US$15 to US$20 per mmBtu.
Asia's third-largest economy needs crop nutrients to feed
its huge agriculture sector, which employs about 60% of the workforce and
accounts for 15% of nearly US$3 trillion economy.
