India Said to Consider Freeing Urea Price to Cut Subsidies

India, the second-biggest producer of rice, wheat and sugar, may end state control on pricing of urea as the government seeks to lower spending on subsidies, three government and two industry officials said yesterday.

A panel of ministers led by Finance Minister Pranab Mukherjee is scheduled to discuss the proposal at a meeting on May 3, said the three government officials, who have direct knowledge of the matter and didn’t want to be identified as the information is not yet public.

A higher price may increase costs of the nation’s 234 million farmers, a powerful voting-block, and derail Prime Minister Manmohan Singh’s plan to tame food inflation which averaged 18 percent in 2010. Urea, the most used fertilizer, is applied to boost yields of rice, wheat, sugar cane and cotton.

“If the decontrol happens, it will be like winning a lottery” for the fertilizer industry, Anup Ranadive, an analyst at Mumbai-based Tower Capital & Securities Ltd., said today. “It will boost investments in the sector.”

India allowed companies to set rates for fertilizers other than urea in February last year in a bid to curb spending on subsidies. Mukherjee has sought to slash subsidies on oil and fertilizers to reduce the budget deficit to 4.6 percent of the gross domestic product in the fiscal year that began on April 1, the lowest in four years.

Should the government not be able to end state controls because of opposition from coalition partners, it may raise the retail rates of the soil nutrient by 10 percent, the officials said. The fertilizer is now sold at 5,310 rupees ($119.5) a metric ton.

Guaranteed Returns

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

Urea producers led by Nagarjuna Fertilizers and Chemicals Ltd. advanced in Mumbai trading on speculation the end to state price control will boost their earnings. Nagarjuna gained as much as 3.1 percent to 32.9 rupees, Zuari Industries Ltd. (ZUAR) increased as much as 1.8 percent to 691.8 rupees and Madras Fertilizers Ltd. (MDF) climbed as much as 4.9 percent to 29.9 rupees.

“The price increase will have a positive impact on the earnings of the fertilizer industry as a whole,” Ranadive said.

Demand for urea may total 14.2 million tons during the June-September monsoon season, compared with 13.7 million tons in the same period a year earlier, according to the farm ministry. The government raised the benchmark import price of potash for the year ending March 31, 2012 to $420 a ton from $390, a government official, who asked not to be named, told reporters in New Delhi yesterday.

Halt Imports

India, the world’s biggest potash buyer, will halt imports of the soil nutrient as the nation has enough stockpiles for growing monsoon-sown crops and because of “exorbitant international prices”, the Fertilizer Association of India said on April 11. The South Asian nation depends on imports for all of its potash, and according to the association it bought 6.4 million tons in the year ended March 31.

Potash Corp. of Saskatchewan Inc. Chief Executive Officer Bill Doyle yesterday said he’s “very confident” a supply contract will be signed with India.

“I’d say is that these statements are just part of the negotiating process,” Doyle said on a conference call with investors and analysts. “India has one of the worst yield- decay ratios of any major agricultural country in the world, and it has no indigenous potash production capability.”

To contact the reporters on this story: Prabhudatta Mishra in New Delhi at pmishra8@bloomberg.net; Pratik Parija in New Delhi at pparija@bloomberg.net

To contact the editors responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net; James Poole at jpoole4@bloomberg.net

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