While companies have the flexibility to set their MRP, these prices remain under close government scrutiny, ensuring affordability without undermining competition

Just around the time when the Rabi Crops season (October 2024 – March 2025) has commenced, there was a shortage of di-ammonium phosphate (DAP) in many parts of the country.

DAP is a widely used complex fertiliser that supplies 46 per cent Phosphate or ‘P’ nutrients besides 18 per cent Nitrogen or ‘N’ (a ton of DAP contains 180 kg ‘N’ and 460 kg ‘P’). The annual consumption of DAP is around 10 to 11 million tons. Against this, domestic production is less than half at around 4.5 - 4.8 million tonnes. The deficit is made up of imports from countries such as Russia, Morocco, Saudi Arabia, Jordan, Egypt and China.     According to the Department of Fertilisers (DoF), the requirement of DAP during the current Rabi season is assessed to be 5.5 million tonnes. Out of this, 60 per cent or 3.3 million tonnes was to be imported.

This much material should have been purchased, transported and placed nearer the consumption areas before the commencement of the season. But, that was not to be. According to the Fertiliser Association of India (FAI), during April-September 2024, DAP imports were 1.96 million tons down from 3.45 million tons during the same period in 2023-24. The domestic production of DAP was 2.15 million tons down from 2.31 million tons during the same period last year. So, there was a reduction in supply of around 1.65 million tons compared to last year. This is the prime reason behind the shortage of DAP.

A plausible explanation could be that many countries from where DAP comes are in the middle east and the crisis due to the war involving Israel and others has led to disruption in the normal Red Sea route forcing the re-routing of ships through the Cape of Good Hope, South Africa. That involves much longer distance hence, taking additional time of up to 45 days for the consignment to reach Indian ports. But, it isn’t simply a case of delay. It has more to do with policy issues. Under the existing policy, the Union Government asks manufacturers or importers to sell fertilisers to farmers at a low maximum retail price (MRP) unrelated to the cost of production/import and distribution (or cost of supply) which is higher. The excess cost of supply over MRP is reimbursed as a subsidy to the manufacturer/ importer.

In the case of urea, MRP is under ‘statutory’ control and subsidy varies from unit to unit (importer in case of import) depending on the cost. For non-urea fertilisers (there are 25 grades of such fertilisers including DAP) which are de jure decontrolled, the MRP is ‘indirectly’ controlled.

The government gives a ‘uniform’ subsidy on a per-nutrient basis to all manufacturers and importers under the Nutrient Based Scheme (NBS). Although they are free to fix the MRP, this is subject to scrutiny by the authorities. In an office memorandum dated January 17, 2024, the DoF has issued detailed guidelines for the evaluation of the “reasonableness” of the MRPs for all non-urea fertilisers covered under the NBS. To be effective from April 1, 2023, the guidelines prescribe maximum profit margins that will be allowed for fertiliser companies - 8 per cent for importers, 10 per cent for manufacturers and 12 per cent for integrated manufacturers (those producing finished fertilisers as well as intermediates such as phosphoric acid and ammonia).

The admissible profit margins are calculated as a percentage of their “total cost of sales”, which covers the cost of production (landed cost in case of import), administrative/selling and distribution overheads, net interest and financing charges. Dealer’s margin is allowed to the extent of 2 per cent of the MRP for DAP and muriate of potash (MOP), and 4 per cent for all other fertilisers covered under NBS. Companies earning “unreasonable profit”, i.e. over and above the stipulated percentages, in a financial year (April-March) or FY will have to refund the same to the DoF by October 10 of the following FY. If they don’t return the money within the said time limit, “an interest @12 per cent per annum is charged on a pro-rata basis on the refund amount from the next day of end of FY (i.e. in case of FY 2023-24, the interest would be charged from April 1, 2024)”.  The guidelines require fertiliser companies to “self-assess” unreasonable profits, based on the cost auditor’s report along with audited cost data approved by their board of directors. This report and data have to be furnished to the DoF by October 10 of the following fiscal year. The DoF will then scrutinise the “reasonability of MRPs”, as submitted by the companies, “for each completed previous FY (i.e. for FY 2023-24) by  February 28, 2025”. Following this scrutiny, the DoF will finalise a report on unreasonable profits earned, if any, to be recovered from the companies.

Such detailed regulations to the point of ‘micro-managing’ a firm by itself act as a deterrent to smooth and effective conduct of its operations. It is completely out of sync with Prime Minister Narendra Modi’s emphasis on policy reforms and liberalisation. It makes a mockery of the decontrol of all non-urea fertilisers announced way back in 1992 under the economic reforms unleashed by the then government under PV Narasimha Rao. From the perspective of the manufacturer/ importer, the ‘reasonable’ MRP allowed to it by the DoF plus the subsidy also fixed by the government (it is notified twice a year before the commencement of each season Kharif and Rabi) should fully cover the cost of supply. If it doesn’t, the manufacturer’s/importer’s operations will be rendered economically unviable. This is precisely what has happened with importers of DAP during the current year. For the Rabi season, the government has announced a subsidy of Rs 21,911 per ton along with the MRP of Rs 27,000. These two add up to Rs 48,911 per ton. Against this, the current landed cost of DAP in the country is US $ 645 per ton or around Rs 54,000 per ton. Add to this, the cost of movement from the port to the consumption point and distribution cost, and the cost of supply to the farmer would be more than Rs 60,000 per ton.

A firm won’t go for such import only to incur a substantial loss of over Rs 10,000 per ton. The crux of the problem is the government doesn’t want farmers to pay more. So, it has kept MRP unchanged at the level it was three years ago. At the same time, it is hesitant to increase subsidies as it will upset its fiscal budget. Its subsidy allocation for non-urea fertilisers has gone down from Rs 112,875 crore during 2022-23 to Rs 60,303 crore during2023-24 and further down to Rs 48,894 crore during 2024-25 (it includes Rs 24,474 crore for Rabi season).  In the process, it ends up impacting supplies as importers don’t find it economical to import. During the previous two years, there wasn’t any shortage as during 2022-23, the government was pretty liberal in spending and during 2023-24, the decline in global prices helped. But, during the current FY, none of these reliefs are available. So, there is stress on the supply front. The government can get out of the logjam only when it stops micro-managing the fertiliser business and leaves it to the market forces. As for subsidies, they should be given directly to farmers.

(The writer is a policy analyst; views are personal)