Gas price hike set to trip fiscal deficit targets

Production cost of urea is likely to go up after the increase, forcing the government to allocate more for fertilizer subsidies

Mumbai: The central government’s decision to double gas prices from April is likely to undermine its efforts to reduce fiscal deficit as the hike will lead to increase in production costs of fertilizers thereby forcing the government to enhance agriculture or food subsidies

This side-effect highlights the difficulties the country faces while introducing market-oriented reforms required to boost economy, while keeping spending in check.

Last year, the Centre had approved a hefty rise in gas prices to around $8.40 per million British thermal units with an objective to enhance viability of gas production in the country. This hike is also aimed at increasing investments into natural gas sector so that gas production will go up and gas supply for power generation will increase thereby easing acute power shortfall in the country.

Gas accounts for nearly 80 per cent of the production cost of urea fertilizer which consumes nearly 50 per cent of fertilizer subsidy that government provides every year. "The gas price hike will increase the annual urea production cost by Rs 10,000 crore," said Satish Chander, Director-General, Fertiliser Association of India (FAI).

Urea prices are decided by the government, which has said any increase in the cost of production will be met through a higher subsidy for manufacturer. According to FAI estimates, the country consumes nearly 3 crore n tonnes a year of urea, with Indian companies supplying 2.2 crore tonnes and the rest imported.

The fertiliser subsidy bill has gone up by three times the past seven years. For the fiscal year 2004-15, government has allocated Rs 67,970 crore in the recent Budget. But FAI strongly feels the subsidy allocation will be inadequate due to hike in production cost driven by higher gas prices.

The country, in a bid to avoid a potential ratings downgrade, is looking to reduce the fiscal deficit to 4.1 per cent of GDP in 2014-15 by reducing the burden of fuel and fertiliser subsidies. With the expected rise in gas prices, it is very unlikely that fertilizer subsidy will come down, analysts say.

However, government can simply shift the onus from the Ministry of Chemicals and Fertilizers to the Ministry of Consumer Affairs, Food and Public Distribution. "The government fixes support prices considering input costs. If the urea price goes up, then it has to raise the MSP (minimum support price) of food grains," said Harish Galipelli, Vice-President for Research, Inditrade Derivatives and Commodities.

"The rise in food grain prices will be reflected in the government's food subsidy. It has promised to provide subsidised food grains to the poor," he added.

Farmers are already protesting the recent price hikes in potash and phosphate-based fertilisers and are demanding a big rise in prices for food grains, sugar cane and cotton. This complicates the government's task of raising urea prices, which is also aimed at curbing excessive usage of the fertiliser that threatens soil fertility. "The price of every farm product should be raised in sync with rising input costs. You can't sell fertiliser at higher prices without raising the support price," said Raju Shetty, MP and farmers' leader from Maharashtra.