Falling Rupee Impacts Fertilizer Costs

Source: The post Falling Rupee Impacts Fertilizer Costs has been created, based on the article “Express view on fertilizer subsidies: Let the market decide” published in “Indian Express” on 4th January 202

UPSC Syllabus Topic: GS Paper2-International Relations-Effect of policies and politics of developed and developing countries on India’s interests. And GS paper 3- Economy

Context: The article discusses the Indian rupee’s recent decline in value against the dollar, which affects the cost of imported goods like fertilizers. This change complicates budgeting for businesses and the government, which is trying to avoid raising prices for consumers despite higher costs. Falling Rupee Impacts Fertilizer Costs

For detailed information on Issues related to fertiliser sector in India read this article here

What is the Current Situation of the Rupee?

1. The Indian rupee has recently decreased in value, falling from 83.8 to 85.8 against the US dollar from the end of September to the present.
2. This decline is significant because it affects the cost of commodities like oil and fertilizers, which are priced in dollars.

For detailed information on Rupee’s Fall Driven by Stronger US Dollar read this article here

What challenges do fertilizer companies face?

1. Increased Import Costs: As the rupee falls, the cost to import fertilizers like di-ammonium phosphate (DAP) increases. For instance, with DAP’s price at over $630 per tonne, a Rs 2 depreciation adds Rs 1,260 per tonne to import costs.
2. Price Regulation: Companies are constrained by the government’s control over the maximum retail price (MRP), which is currently set at Rs 27,000 per tonne for DAP.
3. Subsidy Limitations: While the government has extended a special subsidy of Rs 3,500 per tonne, this does not fully compensate for the increased costs due to currency depreciation, leaving companies with higher operational expenses.

What Are the Broader Implications?

1. The weakening rupee is a warning for the government and companies with foreign debts that have not been hedged against currency risk.
2. It suggests that relying on imports due to a stronger rupee is no longer a cheap option and encourages a shift towards building domestic production capacities.

Question for practice:

Examine how the depreciation of the Indian rupee affects the operational costs of fertilizer companies and the broader implications for the Indian economy.