May 27 (Bloomberg) -- India may seek to attract investment in additional domestic fertilizer capacity by linking prices to global rates, Ram Vilas Paswan, minister in charge of the industry, said in New Delhi today.

The proposed move will apply to fertilizer produced with the additional capacity. Fertilizer prices are subsidized by about 74 percent to make it affordable to farmers.

The insufficient availability of gas, along with pricing and subsidy policies, have discouraged companies from adding fertilizer manufacturing capacity. This has led to a more than six-fold increase in imports of soil nutrients such as urea in the past four years to meet local demand.

The government wants to raise local output to cut the nation's dependence on imports. It plans to double urea capacity by the year ending March 31, 2012, by addressing gas availability and benchmark prices with international rates, said J.S. Sarma, fertilizer secretary.

``That should start attracting new investment,'' Sarma told reporters in New Delhi. A decision by the Cabinet on the pricing policy for additional capacity is expected to be taken by the end of next month, he said.

The government wants to raise urea capacity to 40 million tons by 2012 from 21 million tons, Sarma said. Of the additional capacity, 3 million tons will come from the revamp of existing plants, 3.5 million tons from expansion, 7 million tons from reviving closed plants and the rest from new investment, he said.

The ministry of petroleum and natural gas has pledged supply to fertilizer makers as gas production increases, Sarma said.

Stocks Rise

Shares of fertilizer makers rose on the news. Nagarjuna Fertilizers & Chemicals Ltd. climbed as much as 6.8 percent in Mumbai trading, before closing 2.4 percent higher at 45.5 rupees. Rashtriya Chemicals and Fertilizers Ltd., which gained as much as 5.1 percent, added 1.2 percent to 69.05 rupees. Chambal Fertilizers and Chemicals Ltd., which increased as much as 9.8 percent, rose 6.5 percent to 76.15 rupees.

India's fertilizer subsidy may more than double to 950 billion rupees ($22 billion) in the year to March 31 because of rising international prices and higher raw material costs. The government spent 403.4 billion rupees on subsidies in the year ended March 31, the ministry of chemicals and fertilizer said.

Agriculture, which accounts for about a fifth of the economy, is estimated to have grown at a slower pace of 2.6 percent in the year ended March 31, compared with a 3.8 percent pace in the previous financial year.

The government has said it wants to increase growth in agriculture to an average annual pace of at least 4 percent. To achieve that growth, India needs to increase production of fertilizers amongst other measures.

The government fixes the price at which fertilizer is sold to farmers, pays companies the difference between the costs and selling price and guarantees a post-tax return.

The average subsidy on a ton of urea is 14,080 rupees, or about 74 percent of the total cost, the ministry of chemicals and fertilizers said in a statement today.

To contact the reporter on this story: Subramaniam Sharma in New Delhi at ssharma@bloomberg.net.

Last Updated: May 27, 2008 08:01 EDT