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Explained: Why has the Modi government increased subsidy on DAP?

The government has hiked the subsidy on DAP fertiliser by 137%. A look at the political and economic compulsions that led to the move after fertiliser manufacturers had hiked retail prices.

Written by Parthasarathi Biswas , Harish Damodaran | New Delhi, Pune |
Updated: May 27, 2021 11:14:07 am
Subsidy on DAP fertiliser is up from Rs 511.55 to Rs 1,211.55 per 50-kg bag (File Photo)

Faced with a possible revival of farmer protests — this time over fertiliser prices — the government has announced a 137% increase in the subsidy on di-ammonium phosphate (DAP), from Rs 511.55 to Rs 1,211.55 per 50-kg bag. A look at the economic and political compulsions behind the move, estimated to cost an additional Rs 14,775 crore during the coming kharif season alone.

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What is DAP and why is it important for farmers?

DAP is the second most commonly used fertiliser in India, with its sales of 119.13 lakh tonnes (lt) in 2020-21 next only to the 350.42 lt of urea. Farmers normally apply this fertiliser just before or at the time of sowing, as it is high in phosphorus (P) that stimulates root establishment and development – without which plants cannot grow to their normal size or will take too long to mature. DAP contains 46% P and 18% nitrogen (N). While there are also other phosphatic fertilisers – single super phosphate (SSP), for instance, has 16% P and 11% sulphur (S) – DAP is the farmer’s preferred choice. This is similar to urea and muriate of potash (MOP), which again have very high N and potassium (K) content of 46% and 60%, respectively.

What is the subsidy scheme in DAP and how does it differ from other fertilisers?

The maximum retail price (MRP) of urea is currently fixed at Rs 5,378 per tonne or Rs 242 for a 45-kg bag. Since companies have to sell at this controlled rate, the subsidy (the difference between the cost of manufacturing or import and the fixed MRP) is variable. The MRPs of all other fertilisers, by contrast, are decontrolled and decided by the companies themselves. The government only gives a fixed per-tonne subsidy. In other words, the subsidy is fixed, while the MRPs are variable.

Is the subsidy, then, the same for all non-urea fertilisers?

No, these fertilisers attract what is called nutrient-based subsidy or NBS, whose rates vary across nutrients. For 2020-21, the Centre fixed the NBS rates at Rs 18.789/kg for N, Rs 14.888/kg for P, Rs 10.116/kg for K and Rs 2.374/kg for S. Therefore, depending on the nutrient content in different fertilisers, the per-tonne subsidy varies. Since one tonne of DAP contains 460 kg of P and 180 kg of N, the corresponding subsidy worked out to Rs 10,231 (6,848.48 plus 3,382.02). Likewise, the subsidy on MOP (60% K) was Rs 6,070 per tonne, while Rs 2,643/tonne for SSP and Rs 8,380/tonne for the popular ‘10:26:26’ NPK fertiliser.

So, why this brouhaha over DAP?

The DAP subsidy, as already noted, was Rs 10,231 per tonne or Rs 511.50 on a bag of 50 kg. Most companies, until recently, were selling this fertiliser to farmers at around Rs 24,000 per tonne or Rs 1,200/bag. They could do it when international prices — of both the final product and the imported raw materials/ingredients such as rock phosphate, sulphur, phosphoric acid and ammonia — were at reasonable levels. Landed prices of DAP in India were below $400 per tonne or Rs 29,000 till October. Adding 5% customs duty and another Rs 3,500 towards port handling, bagging, warehousing, interest, trade margins and other costs took it to about Rs 34,000 per tonne. After claiming the subsidy of Rs 10,231 per tonne, companies could sell at the said MRP of Rs 24,000/tonne.

But global prices have surged over the past 6-7 months, tracking the general bull run in commodities. Since October, the average import (cost and freight, Indian ports) prices of DAP have risen from $395 to $570/tonne, while shooting up from $275 to $365 for urea, $230 to $280 for MOP, $280 to $550 for ammonia and $85 to $210 for sulphur. That made it unviable for companies to sell at the old rates.

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What did they do?

All of them steeply raised MRPs. That included the Indian Farmers Fertiliser Cooperative (IFFCO), which announced a hike in its MRP of DAP from Rs 1,200 to Rs 1,900/bag and also for 10:26:26 (Rs 1,175 to Rs 1,775/bag), 12:32:16 (Rs 1,185 to Rs 1,800/bag) and 20:20:0:13 NPKS (Rs 925 to Rs 1,350/bag). These hikes were effective from April 1. Since non-urea fertilisers are decontrolled, nothing technically stopped them from do so. But with West Bengal Assembly elections ten on, the industry was told to keep these on hold. IFFCO, for one, declared that the higher MRPs will be only for the newly produced or imported fertilisers. The old stocks would continue to be sold at the earlier rates.

What happened later?

As the old stocks started running out, the companies began selling the new material at the higher rates. April being a lean month, the extent of price increase did not really dawn upon anybody, farmers included — until home purchases for ensuing kharif planting season started picking up from mid-May. The focus naturally fell on DAP; having to pay an extra Rs 700/bag — on top of Rs 21-22 per litre increase for diesel since April 2020 – was obviously too much.

What has the government now done?

The Department of Fertilisers had, on April 9, notified the NBS rates for 2021-22. Despite international prices soaring, these were kept unchanged from last year’s levels. It left companies wit little choice but to go ahead with the MRP hikes. As the implications of that became clear, Prime Minister Narendra Modi chaired a meeting on Wednesday, following which a “historic decision” was taken to more than double the subsidy on DAP from the existing Rs 10,231 to Rs 24,231 per tonne.

The Department of Fertilisers has further notified a higher per-kg NBS rate for P (Rs 45.323, as against the earlier Rs 14.888), even while not increasing these for the other three nutrients (N, K and S). This will enable companies to sell DAP to sell at the earlier MRP. They may not be able to do so for other non-urea fertilisers, be it MOP, SSP or complexes containing N, K and S. In the case of MOP, the retail prices were raised from an average of Rs 850 to Rs 1,000/bag in February itself. With the subsidy remaining at Rs 303.5/bag, there’s unlikely to be any rollback.

For now, though, DAP prices not going up is good news, as farmers get ready for sowing operations with the arrival of the southwest monsoon rains. Politically, too, a revival of farmer protests, in the midst of Covid-19’s second wave, is the last thing the government would want.

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