Imported Input-Price Transmission

An imported input-price shock occurs when the rupee cost of imported fertilisers, feedstock or raw materials rises because of higher world prices, freight costs or rupee depreciation. Its effect on subsidy expenditure depends on whether the government absorbs the higher cost to protect the farmer’s retail price or permits greater price transmission to farmers.

Channels of transmission

India’s fertiliser industry uses imported finished fertilisers and inputs such as natural gas, ammonia, phosphoric acid, rock phosphate and sulphur. A rise in their landed cost increases the production or import cost of fertiliser; rupee depreciation magnifies this increase even when the foreign-currency price is unchanged.

• Higher international prices and freight charges raise the subsidy requirement per tonne when retail prices remain protected.
• Higher fertiliser consumption or import dependence increases the aggregate fiscal effect of a given price shock.
• Transmission may occur with a lag because procurement, production and subsidy payments take place at different times.

Effect under the subsidy regimes

For urea, the government regulates the farmer’s maximum retail price. When the recognised production or import cost rises while this price remains unchanged, the subsidy generally bears the larger gap, raising government expenditure.

• For phosphatic and potassic fertilisers, the Nutrient Based Subsidy scheme provides notified subsidy rates per kilogram of nitrogen, phosphorus, potash and sulphur.
• If nutrient-based subsidy rates remain unchanged, companies may transmit part of the cost shock through higher retail prices, so expenditure does not rise automatically in proportion to import costs.
• If the government raises nutrient subsidy rates to moderate retail prices, the imported shock is transferred more directly to the budget.

Fiscal implications

The final expenditure impact equals the change in subsidy per unit multiplied by the subsidised quantity, together with any settlement of accumulated claims. Consequently, volatile global input prices create budget uncertainty and may require supplementary allocations or produce payment arrears if the original provision is insufficient.

• The fiscal impact is reduced when global prices fall, the rupee appreciates, domestic efficiency improves or consumption declines.
• Protecting farmers from shocks supports affordability, but weak retail price transmission can also reduce incentives for balanced and efficient fertiliser use.