How China's suspension of fertiliser exports can strain India's subsidy budget

At a time when India has committed to reduce dependency on fertilizer imports and to gain 'AatmaNirbharta' in all fertilizers, a recent move by the Chinese government may also in a way force the Centre to move in this direction in a more aggressive manner. In a recent development, several Chinese fertiliser players have been directed by the Chinese government to suspend fertiliser exports to meet the robust domestic demand amid rising domestic prices driven by limited supplies and rising energy costs. From the Chinese side, this move is aimed at protecting the farming sector from the rising prices. As a whole, this means that now the Chinese fertilizer companies will not be able to export their product.

The two simultaneous moves in two different countries assume special significance in the wake of the fact that the Indian fertiliser industry remains dependent on imports to meet the domestic demand, thanks to limited domestic supplies. The import reliance on urea continues to be significant, given the delay in the commissioning of the new urea plants, resulting in increased domestic production. In the case of DAP the import reliance will continue, with no additional capacities likely in India in the segment.

Significantly, while chairing a high-powered meeting to assess the situation of raw materials in the country for the manufacturing of fertilisers last week, the Union Minister for Chemicals and Fertilisers Mansukh Mandaviya said that India will focus on scaling up the production of fertilisers in the country through indigenous raw materials. At present, India is dependent on other countries for raw materials to produce DAP (Diammonium Phosphate) and SSP (Single Super Phosphate) primarily.

India of the 21st century needs to reduce its dependencies on import. In order to achieve that goal, India will have to explore indigenous deposits of Phosphatic rock and Potash and make it available to indigenous industries to produce DAP, SSP, NPK (Nitrogen, Phosphorous and Potassium) and MOP (Muriate of Potash) to cater the needs of Indian farmers.

China, on its parts, is one of the largest producers of fertiliser in the world with 31 per cent of the global urea capacity and 42 per cent of the Di-Ammonium Phosphate (DAP) capacity. China exported 5.46 MMT of urea and 5.84 MMT of DAP in FY21, which amounted to nearly 11 per cent and nearly 32 per cent share of the urea and DAP global trade.

If a recent report by ICRA is anything to go by, China continues to hold the largest share in the imported fertilisers procured by India with a share of 29 per cent and 27 per cent in urea and DAP imports respectively in FY21.

China's move to suspend exports will put further pressure on the elevated prices in the international markets amid limited supplies. While earlier it was expected that the international prices would start moderating by the end of H1 FY22, with the current development, the prices are expected to sustain through the Rabi season. With rising international price levels, currency depreciation in the last couple of months and firming up of natural gas prices, the subsidy budget for fertilisers could get strained again by the end of FY22.