Interim Budget 2024: India Has A Fertiliser Subsidy Dilemma Amid The Red Sea Crisis

If the Red Sea crisis persists, fertiliser prices in India will likely spike, which could either cause unrest among farmers or force the government to provide more subsidies as the country heads for a national election.

India imported more than US$17 billion worth of fertilisers in 2022, which makes it the world’s second-largest fertiliser-importing nation.

A substantial part of these imports are sourced from countries such as Morocco, Jordan, Egypt, Oman and Saudi Arabia. Ships originating from these countries usually sail through the Red Sea and the Gulf of Aden, the shortest route to India.

These shipments are either being held up or rerouted as Yemen-based Houthis continue their attacks, which they claim is a revenge for Israel’s military action in Gaza.

Prices of fertilisers, mainly diammonium phosphate (DAP), have already spiked in the last six months because of a squeeze in the global supply chain.

China is the world’s largest phosphate exporter and one of the top global urea suppliers, but it has halted urea and DAP exports to India. Its export ban, aimed at maintaining domestic price stability, has pushed up DAP prices further by 26 per cent since July last year.

According to the World Bank, the price of DAP was US$ 454 per tonne in June 2023. It reached US$ 564 per tonne in December 2023.

Current import prices for urea fall between US$ 335 and US$ 340 per tonne, for DAP it is around US$ 595 per tonne and about US$ 320 per tonne for MOP.

These constraints have forced India to depend on other Asian countries to import fertilisers. India has also ramped up purchases of Russian energy and other commodities such as fertilisers since last year.

During a five-day visit to Russia last month, External Affairs Minister S Jaishankar described supplies of energy, coking coal and fertilisers as “very big components” of India-Russia trade. He said the two sides have discussed long-term arrangements in these areas.

“The Red Sea crisis has impacted supplies from the Middle East to India, delaying the shipment period by about 15 days and increasing the freight cost,” said N Suresh Krishnan, President, Fertiliser Association of India, an advocacy body.

If the current situation persists, global fertiliser prices may rise even further, which may push India’s subsidy burden, Krishnan added.

No Subsidy Cut?

India’s annual imports include 0.6 million tonnes of phosphoric acid and 3.7 million tonnes of rock phosphate from Jordan. From Israel, it imports about 0.5 million tonnes of muriate of potash (MOP). Due to the Red Sea conflict, about 100,000 tonnes of fertiliser await dispatch from these countries.

Navigational challenges and security concerns are posing constant threats. Vessels from Israel face heightened risk and even Jordanian shipments experience reluctance due to uncertainties in the Red Sea. Some ships are waiting at the origin port even after being loaded with consignments.

The fear is that as fertiliser prices continue to rise on account of higher freight and insurance costs, the only way left for the government to shield the farmers would be to increase subsidies.

A senior Finance Ministry official said on the condition of anonymity that the government had expected subsidy on fertilisers to either remain stable or be lowered in the budget, but the Red Sea crisis “has thrown a different kind of challenge to us.”

“We are in constant touch with the Ministry of Chemicals and Fertilisers as well as the Ministry of External Affairs. We are closely watching the situation in the Red Sea. We are in the process of finalising the total outlay for this,” he said, adding that the government can always revise the subsidy as and when the need arises.

In FY 2022-23, the Centre spent Rs 2.51 lakh crore on fertiliser subsidies, according to the revised estimates. The budget for FY 2023-24 allocated much less, about Rs 1.75 lakh crore, in anticipation that global fertiliser prices would soften through the year. They did until the Israel-Hamas conflict broke out. An additional Rs 13,000 crore was allocated via supplementary demand for grants in the winter session of parliament.

India has deployed at least 10 warships to the region stretching from the north and central Arabian Sea to the Gulf of Aden to counter rebel attacks. Still, for safety reasons, several commercial ships have started avoiding the region and taking the longer route via the Cape of Good Hope.

The Indian government believes the country’s fertiliser and other supplies will not be impacted much because of the simmering conflict.

“The Red Sea crisis will not have an impact on Indian trade, including fertiliser imports as the government is intervening and the Indian Navy is providing security to get vessels in the country safely,” Chemicals and Fertiliser Minister Mansukh Mandaviya has said. However, he added, this has raised freight costs significantly.

Mandaviya has asserted that there will be no shortage of fertilisers during the next Kharif season (June-October) as the government keeps reserve stocks for one season in advance.

Still, the next two months are going to be crucial if the conflict in the Red Sea prolongs or spreads and pushes fertiliser prices up further.