Fertiliser subsidy set to touch record Rs 1.65 lakh crore in FY23: Report

However, the steep rise in raw material prices has been negating this and another intervention may be needed in 2022-23, the Crisil report noted. "Over 85 per cent of the subsidy arrears could be contributed by urea.

This is because pooled gas prices – a blend of domestic gas and imported LNG considered for billing to fertilisers plants – had shot up more than 75 per cent last fiscal, and is expected to remain elevated for most part of 2022-23, because of the Russia-Ukraine conflict," Crisil Ratings director Nitesh Jain said.

At the same time, retail prices of urea have stayed put, increasing the government's subsidy burden, he noted. "This would be despite some respite likely from the commissioning of new domestic capacities that could potentially halve India's import dependence for urea from nearly 28 per cent in fiscal 2021," he added.

The retail selling price (RSP) of urea is fixed by the government, the report explained. To spur farmers to use fertilisers for better crop yield, the government keeps the RSP significantly lower than the market rate, and reimburses the urea makers through subsidy payments, it said.

While this protects the profitability of urea makers to a large extent, the RSP remaining unchanged despite rising costs will mean the government will have to foot a bigger subsidy bill, it added. Likewise, prices of phosphoric acid and rock phosphate – ingredients for non-urea fertilisers – have also gone up by 92 per cent and 99 per cent, respectively, in the past 12 months through March 2022.

Further, given that Russia, Belarus and Ukraine are the major suppliers of non-urea fertiliser ingredients, the ongoing conflict will only exacerbate the situation, it stated.

While non-urea makers have hiked prices, it may not be sufficient to cover the escalation in cost, Crisil said. For non-urea fertiliser makers, the government pays subsidy as per the nutrient-based subsidy (NBS) rates, which are yet to be announced for this fiscal.

In this backdrop, the credit profiles of fertiliser makers will depend on factors like additional subsidy outlay, mainly for urea makers, and revision of NBS rates for non-urea makers. Any delay in, or inadequacy of, subsidy payments can have a bearing on the cash flows of fertiliser makers, and lead to higher working capital needs, the report added.