Indian Fertilizer Sector All Quiet on India's Fertilizer Front?

Author / Editor: Data Source: ICRA / Dominik Stephan

The Indian economy is still, to some extent, dependent on the agriculture. This is where fertilizers’ significants come into play... PROCESS India provides an overview of the fertilizers industry in India...

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Indian farmers working in the field where fertilizers play important role.
Indian farmers working in the field where fertilizers play important role.
(Picture: / Nicholas Bayss)

Despite partial decontrol of non-urea fertilizers in the past, the Indian fertilizer sector remains one of the most regulated sectors in the country. Amongst these, the urea sector (which accounts for around 50 per cent of the fertilizer consumption) is completely regulated where retail price is fixed and subsidy is variable in order to ensure cost plus return (12 per cent post tax RoE). On the other hand, the non-urea sector (viz DAP and NPK fertilizers) functions under a fixed subsidy – variable retail price framework, with considerable pricing freedom being granted since April 2011.

The core long term demand drivers for the fertilizer industry remain steady with improving farm economics and rising thrust on irrigation. However, price driven factors are increasingly impacting consumption pattern among fertilizers. Partial price deregulation (fixed urea price and variable non urea fertilizer prices), lower subsidies (under NBS) and weak rupee have significantly widened the retail price differential between urea and non-urea fertilisers, thus further skewing the consumption in favour of urea. In the near term, poor monsoon indications and inventory overhang of nonurea fertilisers, should however negatively impact demand in the P&K sector.

Steady Demand for Fertilizers Drives Growth

While, the overall demand growth for fertilizers industry has remained steady at around five per cent over the period 2005- 12, production has remained largely stagnant during the said period. The latter is a result of lack of capacity creation due to various policy related hurdles and limited availability of raw materials to some extent.

As a result, India’s dependence on fertilizer imports has increased at a rapid pace, and currently imports constitutes around 27 per cent of urea consumption and 68 per cent of DAP consumption. Additionally,given that India is deficient in primary sources of fertilizer inputs (such as natural gas, rock phosphate, potash); it has sizeable import dependence for the intermediates like phosphoric acid and ammonia.

In 2011, Government of India (GoI) appointed a committee to suggest improvements in the old urea investment policy as the latter failed to encourage investments due to lack of transparent gas price pass through mechanism... More on page 2!