Categorical view on fertilizer subsidies: Let the market resolve

The rupee’s slide, from round 83.8 to 85.8-to-the-dollar between end-September and now, has launched a brand new supply of uncertainty for financial brokers and policymakers alike. With most globally-traded commodities priced in {dollars} and people displaying little indicators of easing — Brent crude has crossed $75/barrel for the primary time in two months — it has difficult each costing and monetary calculations. As long as the rupee moved inside an 82-84 vary, because it did for practically two years from early-October 2022, solely greenback costs mattered. However right this moment, it’s not simply costs in {dollars}, but in addition the corresponding change price in rupees that must be factored in. Compounding the scenario additional is the dearth of readability on how way more the rupee would weaken within the coming weeks and months. As issues stand, the long-dollar, short-rupee commerce seems to be more likely to proceed, at the very least until the inauguration of US President-elect Donald Trump and his preliminary coverage pronouncements. The results of those are already being seen, for example, in fertilisers.

Take di-ammonium phosphate (DAP), India’s second-most consumed fertiliser after urea, whose present landed import value is upwards of $630 per tonne. A Rs 2-to-the-dollar depreciation would push up the worth of shipments contracted at that value by Rs 1,260 per tonne. Not for nothing, then, that fertiliser firms are hesitant to import. On this case, their fear shouldn’t be solely over the import value in {dollars} and the change price, but in addition whether or not the federal government would allow them to go on the resultant greater price to farmers. The federal government, however, doesn’t need firms to extend the utmost retail value (MRP) from the current Rs 27,000 per tonne. It has accepted the extension of a particular subsidy of Rs 3,500/tonne, which was being given on DAP until December 31, for an extra one-year interval. However that extra subsidy can’t cowl the impression of rupee depreciation. It, then, leaves solely two selections, of both permitting an MRP hike or the federal government incurring a fair greater fertiliser subsidy invoice.

The rupee’s weakening is, in a way, a wake-up name, be it for the federal government or these with unhedged international forex exposures. An overvalued rupee made it simpler for the federal government to maintain costs of imported fertilisers and gas artificially low for farmers/customers and for companies to borrow low cost in {dollars} with out defending in opposition to change threat. Imports additionally grew to become a default sourcing choice for firms, together with huge retailers, that didn’t actually attempt to construct home manufacturing provide chains. These choices that had been seemingly straightforward and costless are not so. That is the correct time for the federal government to go away it extra to the market to resolve what the MRP of DAP or the rupee’s change price ought to be.

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