The government plans to introduce differential subsidies for di-ammonium phosphate (DAP) under the Nutrient Based Subsidy (NBS) scheme, as surging sulphur prices make domestic production of the key fertiliser increasingly expensive, people aware of the matter said.

Under the proposed system, subsidy support could vary depending on whether DAP is manufactured domestically using imported rock phosphate or phosphoric acid, or imported directly as finished fertiliser, they said. The government is considering providing different subsidy rates on imported rock phosphate and phosphoric acid based on government-set floor prices, the people said. The move is aimed at encouraging domestic production of DAP and reducing dependence on increasingly expensive imports of the finished fertiliser.

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The new regime could be implemented from the upcoming rabi season, they added.

Under the existing NBS regime, the government fixes per-kilogram subsidy rates for four nutrients - nitrogen (N), phosphorus (P), potash (K) and sulphur (S) - taking into account factors including international prices of fertilisers and their inputs. The subsidy payable on individual fertilisers is then determined by their nutrient composition. The rates are revised for each cropping season. However, the economics of DAP can vary considerably depending on the production route, said one person quoted above. "There can be three rates for the same product," said another person quoted above.

Indian manufacturers can import rock phosphate and process it into phosphoric acid before producing DAP. Alternatively, they can import phosphoric acid and manufacture DAP domestically, or import finished DAP directly. These routes have different cost structures, particularly when prices of sulphur and other inputs rise sharply. The proposed differential subsidy mechanism is intended to account for these differences and make domestic production more viable relative to imports of finished DAP. "Margins are higher when DAP is produced using rock phosphate. The government wants companies to pass that on to farmers," said a third person quoted above.

Sulphur is a key part of the DAP production chain. It is used to manufacture sulphuric acid, which is required to process rock phosphate into phosphoric acid, a key input for producing DAP.