The cabinet approved the following changes to fertilizer policy that will be operational from April 2010. These changes will reduce the govt’s subsidy burden.
The govt. has proposed a 10% hike in farm-gate prices of urea to ~INR5,310 from ~INR4,830 per ton currently. This will likely reduce the overall fertilizer subsidy burden by ~INR13bn in FY11. However, the earnings impact for urea companies will be minimal, given realization for them will not likely change. Moreover, as per our economist Indranil Sen Gupta, the urea price hike will increase inflation by 25bps.
Going forward, the govt will fix the subsidy per kg of nutrients, so the total subsidy on a fertilizer product will depend on its nutrient content. There will also be an additional subsidy for products containing micro/secondary nutrients. Tata Chemicals, Zuari and Coromandel will be the key beneficiaries of this change
Companies will be free to decide farm gate prices of non-urea fertilizers. This will result in – direct linkage between farm gate prices and import parity prices after adjusting for the subsidy and competition between companies on price to gain market share. However, the govt can intervene in the market to keep prices near current price levels as far as possible.