By Rajendra Jadhav and Kaustubh Kulkarni
MUMBAI, March 1 (Reuters) - After effectively halving its subsidy on fertilisers for 2013/14 in the budget, India will have to allow producers to take the politically sensitive step of hiking urea prices to farmers or provide additional funding, industry officials say.
If the government fails to provide the funds, companies would stop production and that could trigger a shortage of fertilisers, which help farms produce the massive amounts of grains the government gives at cheap prices to the poor.
Fertilisers are the third-biggest item in the government's huge subsidy bill after oil and food. New Delhi has already cut some support from fuel prices but has hesitated to rein in other spending ahead of elections that must be held by May 2014.
In his budget for the year starting April 1, 2013, Finance Minister P. Chidambaram on Thursday estimated the fertiliser subsidy at 659.72 billion rupees ($12.10 billion), broadly unchanged from a revised estimate of 659.74 billion rupees for the current year.
But fertiliser companies say this year's subsidy is far short of what they need to make up for selling urea, potash and phosphate at government-set low prices and they have been told the difference will come from 2013/14 finances.
"The outstanding amount from the current year is nearly 35,000 crore (350 billion) rupees. This would be paid from the subsidy allocation for next year," said U.S. Awasthi, managing director of the Indian Farmers Fertiliser Co-operative.
"Effectively the government has allocated only 30,000 crore (300 billion) rupees for next year," Awasthi said.
India's government quite often defers some payments for a couple of months, but the fertiliser subsidies have not been paid since August and the amounts are much larger this time.
The country's twin deficits -- fiscal and current account -- have reached levels that have prompted a wave of prudence from the government, but the 2013/14 budget kept an eye on elections due by next year and went for a surge in spending to push growth.
Pushing back spending on subsidies into 2013/14 would help Chidambaram reduce the fiscal deficit for the current year. He has said there could be more spending if finances improve but next year's budget assumes hefty revenue increases on the back of a strong recovery in growth which many economists doubt.
"The subsidy is under-budgeted, keeping in mind targets for the fiscal deficit number at the time of presenting the budget," said Tarun Surana, analyst at Sunidhi Securities & Finance in Mumbai.
"The subsidy on domestically-produced urea remains a worry as the proposed allocation will fall short after settling bills for September 2012 to March 2013 during the next financial year," he added.
The nitrogenous fertiliser urea accounts for the bulk of the subsidy bill, but the government usually avoids raising prices fearing a political backlash from the large farm votebank.
Indian farmers use urea to produce the vast amounts of wheat and rice the government needs for its welfare programmes that provide cheap grains to the poor, who make up just under half its 1.2 billion population.
The delay in subsidy disbursement is hurting the profits of fertiliser makers like Rashtriya Chemicals and Fertilizers and Tata Chemicals, as they need to pay higher amount of interest. Shares in both companies were trading lower on Friday.
The companies are lobbying for help from New Delhi.
"We have already asked the government to raise urea prices," said Satish Chander, director general of Fertiliser Association of India, the main industry lobby group.
Awasthi said if the government did not raise urea prices, it would have to increase subsidies for the companies later in the year.
India imports all its potash and about 90 percent of its phosphate requirement. The country also fulfils more than one third of its urea requirement from imports. ($1 = 54.5 Indian rupees) (Editing by Jo Winterbottom; Editing by Richard Pullin)