India's plan for a gas price hike, virtually double it, from April threatens to hit government efforts to cut its fiscal deficit, as higher production costs for the country's most widely used fertiliser force authorities to raise either farm or food subsidies.
The unwanted side-effect highlights the difficulties the world's second-most populous nation faces introducing market-oriented reforms needed to kick-start the economy, while keeping spending in check. Also read: Mukesh Ambani's Reliance Industries, not partners, to get revised price for gas
India last year approved a hefty rise in gas prices to around $8.40 per million British thermal units in a bid to boost returns for local producers, spur investment in the industry and ease acute power shortages.
Gas accounts for nearly 80 per cent of the production cost of urea, a nitrogenous fertiliser that consumes more than half of the $11 billion India spends each year subsidising farmers for selling fertilisers at below the cost of production.
Govt has approved a hefty rise in gas prices to around $8.40 per million British thermal units."The gas price hike will increase the annual urea production cost by 100 billion rupees," said Satish Chander, director-general, Fertiliser Association of India (FAI).
Urea prices are set by the government, which has said any increase in the cost of production would be met through a higher subsidy for manufacturers. A less politically palatable alternative would be to allow manufacturers to pass on the costs through higher prices.
India consumes about 30 million tonnes a year of urea, with local producers supplying 22 million tonnes and the rest imported, FAI estimates.
Fearing a backlash from the politically influential farm block, the government has already held urea prices well below those of alternative potash and phosphate-based fertilisers whose producers have been allowed to raise prices since 2010.
The fertiliser subsidy bill has tripled in the past seven years. The government has allocated 679.7 billion rupees in 2014/15, but Chander says the figures stands well short of what's needed given the impact of the gas price hike.
FOOD OR FERTILISER?
In a bid to avoid a potential ratings downgrade, Asia's third-largest economy aims to cut its fiscal deficit to 4.1 percent of GDP in 2014/15 by lowering fuel and fertiliser subsidies.
But even allowing the urea price to rise is unlikely to trim the government's subsidy burden, analysts say.
Instead it will simply shift the onus from the