A spike in natural gas prices could upset fertiliser subsidy estimates in Union Budget 2023-24 as the Ukraine war continues to put pressure on LNG prices.

Fertiliser subsidy in this fiscal year has more than doubled to Rs 2.15 lakh crore from Rs 1.05 lakh crore, which could go up further by March, analysts said.

Sources said the subsidy in the budget could be similar to the budget estimate (BE) of the current fiscal of about Rs 1 lakh crore. Given the geopolitical situation and expectations of recession in the Western world, input cost could swing widely.

Lower allocation of subsidy on fertilisers will help to cut the budget deficit.

However, a lower allocation could push up inflation.

The government uses the subsidy to reimburse companies for selling the fertilisers to farmers at below-market prices. If farmers have to bear the higher costs, they might scale back the use of crop nutrients, putting food production at risk, analysts said.

Two-thirds of India’s annual fertilizer subsidy goes towards urea, the most commonly used soil nutrient produced from natural gas. Domestic gas producers have been facing a gas shortage because of the conflict in Eastern Europe.

Manish Gupta, senior director at Crisil Ratings Ltd, said while the budgeted subsidy amount should be enough to meet non-urea fertiliser sales for this fiscal, a continued surge in gas prices could increase the risk for the urea segment.

“On the basis of our estimates, overall, there could be a subsidy build-up of around Rs 40,000-45,000 crore for this year, over the announced bill of Rs 2.15 lakh crore,” said Gupta.