Teji Mandi Explains: Tale of govt subsidiaries - Give with one hand and take away with the other

The subsidy that the Government of India announced on DAP fertiliser has been received with much fanfare.

It is aimed at nullifying the impact of rising input costs. The key ingredients used in di-ammonium phosphate (DAP) have seen a massive surge in prices over the last year. Ammonia prices, for instance, have jumped 135% YoY to USD 545/mt in May 2021. And phosphoric acid prices have increased 70% to USD998/mt.

Due to this surge in input prices, DAP prices in the global market have increased by 94% to USD 583/mt. With increased cost, prices were set to increase to Rs 2,400/bag as against Rs 1,200/bag till last year.

The government has increased the subsidy on DAP by 140% from Rs 500 to Rs 1,200 per bag to protect Indian farmers from its effect. The increased subsidy will help farmers to continue buying DAP at the old price of Rs 1,200/bag.

Increased subsidy on DAP has come at a time when global food prices are fast increasing. This intervention by the government will reduce the burden on farmers and keep food inflation in check.

Loss for Sugar Exporters

Increased subsidy on fertilisers will put an additional burden of ~Rs 15,000 crore on the government. This is in addition to the budgetary allocation of Rs 80,000 crore for BE2021-22. This has been compensated by reducing the subsidy given to the sugar exporters.

The central government today slashed the amount of subsidy given for sugar export by one-third from Rs 6000/tonne to Rs 4000/tonne, as the industry has already completed 95% of the sugar export target in May 2021. The country has already exported 5.7 mn tn of sugar against the target of the 6.0 mn tn for the year. Hence, India is comfortably placed for the current crop year, which ends in September.

Despite the subsidy cut, the momentum is expected to continue as global prices have remained high. It will allow sugar mills to protect their margins despite the reduced subsidy protection.

Closing Comments

The sugar industry is set to achieve its yearly targets by comfortable margins. In fact, India is set to report its highest-ever sugar export in the current crop year. Hence, the government has opted to cut the subsidy cover for the sector and offer it to another industry where it is needed the most- like, the fertiliser sector.

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