Fertilizer subsidy bill faces West Asia shock

While the government makes tentative estimates of the subsidy bill at the beginning of the financial year—based on sowing and irrigated area and past demand—there is an implicit commitment to scale it up to meet unforeseen circumstances.

“Fertilizer prices are expected to go up, which might require higher subsidies," said an official at Indian Farmers Fertilizer Cooperative Ltd (Iffco). In the past, the government has been making special financial provisions for additional subsidies in case of a spike in global prices.

For the 2025-26 budget estimate, an amount of ₹1.68 trillion has been allocated for the fertilizer subsidy. The Centre spent ₹1.71 trillion in FY25 and ₹1.88 trillion in FY24 on the subsidy.

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The Budget estimation of the Department of Fertilizers is made on the basis of likely consumption of fertilizers, the price of natural gas—which is the major input cost in fertilizer production—and international price of finished fertilizer products, which may vary from one year to another.

Import dependent

In 2024-25, India imported 4.97 million tonnes (mt) of diammonium phosphate (DAP), which was more than half what India consumes. Similarly, the country is fully dependent on imports for muriate of potash (MOP) for domestic consumption. The country imported 3.83 mt in 2024-25. India is also dependent on imports for 50% of its phosphoric acid needs. According to experts, a volatile global market, geopolitical constraints and gas prices are set to impact fertilizer prices.

According to Anand Kulkarni, director, Crisil Ratings, India imports 60% of DAP and 15% of its urea requirements. Together these two make up 70% of domestic fertilizer consumption.

“Amidst the fertilizer exports cut by China during fiscal 2025, India imports of DAP and urea from countries like Saudi Arabia, UAE and Qatar increased and were around 40-45% and 25-30%, respectively, during fiscal 2025. In case of closure of Strait of Hormuz, amidst the ongoing conflict, imports of fertilizers from countries in the region may get impacted. However alternative supply arrangements from new trade routes or other countries can mitigate supply risk," said Anand.

Crisil is of the view that the disruption in supplies from these countries to the overall market is likely to increase in prices in the short term. Moreover, indirect impact via rise in shipping, freight and insurance costs may lead to inflation in input prices as a lot of fertilizer shipments passes through the Strait of Hormuz.

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Crisil said that in case of a sustained increase in the international prices of fertilizers due to the ongoing conflict, the government subsidy bill may increase. The government typically supports the sector via additional subsidies to keep farm gate prices of fertilizers under control. 

"Cost of procurement for complex fertilizers like DAP may increase given significant import dependence and a likely rise in the international prices," said Anand.

For Urea sector, the impact will be largely in case of increases in Brent crude prices. A sustained increase in Brent crude prices beyond the existing range of $73-76 per barrel (bbl) is likely to increase the imported natural gas prices which are linked with Brent crude. 

An increase in subsidy was seen in fiscal 2023 amidst an unprecedented increase in raw material prices like phosphoric acid and ammonia, leading to a historically high budgetary allocation of ₹2.5 trillion, added Anand. 

An email sent to the Ministry of Chemicals and Fertilizers remain unanswered.

Monsoon buoy

Buoyed by an above-normal monsoon forecast, India’s fertilizer consumption in the kharif season is estimated to be up by 5.5% to 36.26mt as compared with 34.35mt total sales reported in 2024-25 kharif season. Out of the total consumption, Urea demand is anticipated at 18.54mt, DAP 5.7mt, and MOP 1.11mt. 

"Urea from the Arab Gulf is a major source of urea for India, which can be impacted because of the ongoing tension. Countries like  the UAE, Qatar, Kuwait, Saudi Arabia, Oman, Iran and Egypt export close to 15- 20mt of Urea and 3-4mt of DAP to the global markets. The Strait of Hormuz is hugely important for the global urea trade. Hormuz alone accounts for over 20% of global gas trade," said Sanjiv Kanwar, managing director, Yara South Asia, part of Norwegian multinational crop nutrition company.

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"While India has over the past few years been diversifying its energy sources, a potential disruption of gas flows via the Strait of Hormuz will potentially have an impact on global pricing – India might need to pay a higher price." 

According to him Urea, and DAP prices can potentially see a significant jump. "If the fertiliser and raw material prices go up significantly,there will be a need to increase the fertiliser subsidy,' Kanwar said.

According to people privy to the development, the government and the Industry are working closely to ensure sufficient product availability for the farmers.