India to Spend $2 Billion More to Cap Nutrient Price for Farmers

Granules of Diammonium phosphate (DAP). (Photographer: Andrey Rudakov/Bloomberg)

India to Spend $2 Billion More to Cap Nutrient Price for Farmers

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India increased its subsidy for di-ammonium phosphate to shield farmers in the country, where about of 60% people depend on agriculture for their livelihood, from the impact of costlier imported raw materials for the farm nutrient.

The decision to raise the incentive to 1,200 rupees ($16.4) per bag from 500 rupees was announced by the government in a statement late on Wednesday. Local farmers can buy the fertilizer at the same price as last year, it said.

India to Spend $2 Billion More to Cap Nutrient Price for Farmers

The latest move comes amid protests by farmers against new agriculture laws and the spread of coronavirus in rural areas, posing a risk to the farm sector that has been the only bright spot for the economy during the pandemic. The higher subvention will help farmers cut costs and help them bolster the production of crops. India is the world’s top grower of cotton and the second-biggest producer of sugar, wheat and rice.

Farm nutrients in India are sold to farmers at a price that’s generally below the cost of production, with the government compensating the producers for the shortfall. Prices of phosphoric acid and ammonia, used to make the soil nutrient, have risen by 60% to 70% in the global market, according to the statement. The fertilizer is used to grow crops including potatoes, wheat, corn, soybeans, rapeseed and sunflower.

The subsidy hike comes at a time when government finances are already under stress. India has so far resisted calls to announce any major fiscal stimulus measures to soften the blow of a fresh virus wave. It’s trying to narrow the fiscal deficit after a record widening last year. With a limited fiscal room for more steps, as revenue sources come under pressure, the government has left much of the heavy lifting to monetary policy makers.

India to Spend $2 Billion More to Cap Nutrient Price for Farmers

The measure would result in extra spending of 147.8 billion rupees this year by the government, in addition to about 800 billion rupees it allocates each year to keep fertilizer prices affordable in the country.

The enhanced subsidy would add 7 basis points to the fiscal deficit, assuming lower nominal GDP growth of 12.4% compared with the government’s budgeted 14.4%, said Garima Kapoor, an economist at Elara Capital.

“The decision was unexpected as the nutrient-based subsidy prices are normally set in April and this time the subsidy was kept unchanged in April 2021,” Kapoor said. While there may have been a political consideration for this move, another factor that may have prompted this announcement is the spread of Covid-19 in rural areas and the impact on rural sentiment, she said.

“This decision would help to ameliorate the sentiment in rural India,” Kapoor said.

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