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India plans to cut its fertiliser subsidy bill by at least 15 percent for the fiscal year 2013-14, four sources told Reuters, a move that takes advantage of a fall in international prices to help narrow the country's fiscal deficit.
Fertilisers, after oil and food, account for the third-biggest share of India's total subsidy bill, which is expected to rise to 2.4 percent of gross domestic product (GDP) in fiscal 2012/13.
The government had estimated the fertiliser subsidy at 609.7 billion rupees for the fiscal year ending next month, but it is likely to be much higher than the target.
Based on the estimated subsidy level for 2012/13, a 15 percent cut would save the government nearly 91.5 billion rupees. Calculating from the projected fiscal deficit for this year, this would narrow the deficit by as much as 0.1-0.2 percentage point.
Finance Minister P. Chidambaram has staked his reputation on lowering the deficit to 5.3 percent of GDP to improve the investment climate following ratings agency threats to downgrade India's sovereign debt to junk if action was not taken.
Reuters reported exclusively last week that, after small steps to reduce fuel subsidies, Chidambaram is now putting welfare, defence and road projects on the chopping block in a last-ditch attempt to hit his deficit target by next month.
A senior official at the fertiliser ministry with direct knowledge of the plan said the subsidy bill would be reduced by at least 15 percent or more in the next financial year, though the actual cut will depend on the views of the agriculture and finance ministries.
"Since international prices have fallen, obviously, (the) subsidy will go down," Junior Fertiliser Minister Srikant Jena told Reuters separately, adding that a final decision on the extent of the cut was yet to be taken.
The move is unlikely to trigger opposition from farmers as the government plans to leave unchanged the subsidy for urea, the most-used fertiliser, an official with a Mumbai-based state-run fertiliser company said.
A senior official with the country's leading co-operative fertiliser company said most of the subsidy reduction would come from potash and phosphate-based fertilisers as import prices have gone down.
India imports all its potash and about 90 percent of its phosphate requirement.
India imported muriate of potash (MoP) at an average price of $490 a tonne in 2011/12, while prices of diammonium phosphate (DAP) hovered around $580 per tonne.
This week, India agreed to buy MoP at $427 a tonne for 2013/14 while global DAP prices have fallen to about $525 a tonne, giving the government much-needed leverage to cut subsidies without raising retail prices and angering farmers.
Shares of the top North American potash sellers, Potash Corporation of Saskatchewan Inc, Mosaic Co and Agrium Inc were mixed in early trading.
The three producers, through their offshore sales agency Canpotex Ltd, struck a potash supply contract with Indian buyers this week, following India's similar deal with Russian producers Uralkali OAO and Belaruskali.
"Indian importers, such as IPL (India Potash Ltd), would likely only agree to new potash contracts once it had an idea on the government's views on 2013/14 subsidy levels, so the pricing/volume agreed to would likely have already been factoring in where the subsidy levels are going," said analyst Joel Jackson of BMO Capital Markets.
Potash Corp said on January 31 that it expects 2013 to be a more profitable year than 2012, but Chief Executive Bill Doyle said he wasn't expecting India to drive global potash demand this year.
Potash producers have long criticized India's government for slashing subsidies for the crop nutrient. Farmers do not generally apply potash to soils every year, unlike nitrogen, but going too long without it can lower yields and crop production.
The state-run fertiliser company official said the government wants companies to lower retail prices of potash and phosphate, cushioning the impact of lower subsidies.
For the current fiscal year, India slashed subsidies for DAP by 27.4 percent from the previous year, while subsidies for MoP were cut by 10 percent. This forced fertiliser companies to raise retail prices, angering farmers, who cut consumption.
"Higher fertiliser prices and drought in some areas cut consumption this year. Consumption is unlikely to revive next year, if the government decides to cut subsidies further," said the fertiliser company official.
Weak fertiliser demand can hit the profitability of Indian firms such as Rashtriya Chemicals and Fertilizers, Tata Chemicals, National Fertilizers, GSFC, Coromandel International and Chambal Fertilisers and Chemicals.
It can also reduce India's DAP and MoP imports.
ICL Israel Chemicals Ltd and Germany's K+S AG are also major potash suppliers to India.
Moroccan phosphate producer Office Cherifien des Phosphates, PhosChem and Russian fertiliser group Phosagro are key DAP supplier to India.