New Delhi, India's heavy reliance on imported Liquified Natural Gas (LNG) as a fertiliser feedstock exposes the nation's balance sheet to ongoing global gas price hikes, increasing the government's fertiliser subsidy bill, a new report by the Institute for Energy Economics and Financial Analysis (IEEFA) said on Monday.

By shifting away from expensive LNG imports for fertiliser production and using domestic supplies instead, India could reduce its vulnerability to high and volatile global gas prices and ease the subsidy burden, the report says.

Natural gas is the main input (70 per cent) for urea production, and even as global gas prices increased 200 per cent from $8.21/MMBtu (metric million British thermal unit) in January 2021 to $24.71/MMBtu in January 2022, urea continued to be provided to the agriculture sector at a uniform statutory notified price, which led to an increased subsidy.

"The budget allocation for the fertiliser subsidy is about $14 billion or Rs 1.05 trillion," says report author Purva Jain, IEEFA analyst and guest contributor, "making it the third year in a row that the fertiliser subsidy has topped Rs 1 trillion".

"With the already high global gas prices exacerbated by the Russian invasion of Ukraine, the government will likely have to revise the fertiliser subsidy much higher as the year progresses, as it did in FY2021/22."

This situation is compounded by India's dependence on Russia for phosphatic and potassic fertilisers such as NPK and MoP, says Jain.

"Russia is a major producer and exporter of fertiliser and supply disruptions due to the war are driving up fertiliser prices globally. This will further increase the subsidy outlay for India."

To meet the higher input costs for domestically manufactured fertiliser and more expensive fertiliser imports, the government almost doubled its 2021/22 budget estimate for the subsidy to Rs 1.4 trillion ($19 billion).

The prices of domestic gas and imported LNG are pooled to supply gas to urea manufacturers at a uniform price.

With domestic supplies being diverted to the government's city gas distribution network, the use of expensive imported LNG in fertiliser production has been rising rapidly.

In FY2020/21 the use of regasified LNG was as high as 63 per cent of the total gas consumption in the fertiliser sector, according to the report. "This results in a massive subsidy burden that will continue to rise as the use of imported LNG in fertiliser production increases," says Jain.

"LNG prices have been extremely volatile since the onset of the pandemic, with spot prices reaching a high of $56/MMBtu last year. LNG spot prices are forecast to remain above $50/MMBtu through to September 2022 and $40/MMBtu until the end of the year. This will be detrimental for India as the government will have to heavily subsidise the massive increase in urea production costs."

As an interim measure, the report suggests allocating the limited domestic gas supplies to fertiliser manufacturing instead to the CGD network.

This would also help the government to meet the target of 60MT of urea from indigenous sources.

In the longer term, the development at scale of green hydrogen, which uses renewable energy to make green ammonia to produce urea and other fertilisers, will be critical for decarbonising farming and for insulating India from expensive LNG imports and a high subsidy burden.

"This is an opportunity to enable cleaner non-fossil fuel alternatives," says Jain.

"The savings in subsidies as a result of reducing the use of imported LNG could be directed towards the development of green ammonia. And investment for the planned expansion of CGD infrastructure can be diverted to deploying renewable energy alternatives for cooking and mobility."