Mumbai, March 26 India's annual production of urea and complex fertilizers is likely to decline by 10-15 percent due to supply chain disruptions caused by the ongoing conflict in the Middle East, according to a Crisil Ratings report released on Thursday.
"The ongoing issues in the Middle East could disrupt the fertilizer supply chain at a crucial time for the monsoon season. Disruptions in the supply of LNG and ammonia, lasting for about three months, could reduce domestic production of urea and complex fertilizers by 10-15 percent," said Crisil Ratings Director Anand Kulkarni.
However, he said that the recent government directive allocating 70 percent of gas to urea manufacturers would cushion the impact on production to some extent.
He added that the fertilizer inventory of around three months, along with expected imports from alternative sources, will mitigate the risk of immediate supply shortages.
Furthermore, Crisil Ratings said that the increase in the prices of raw materials and imported fertilizers is likely to increase the working capital requirements of manufacturers and also raise the government's subsidy bill by ₹20,000-25,000 crore.
Urea accounts for 45 percent of fertilizer consumption in India, complex fertilizers (diammonium phosphate, or DAP, and nitrogen, phosphorus and potassium, or NPK) for one-third, and single super phosphate (SSP) and muriate of potash (MOP) for the rest.
The fertilizer sector's dependence on imports remains high, with 20 percent of urea and one-third of complex fertilizers, primarily DAP, being imported.
The key raw materials for urea (natural gas, which comprises 80 percent of the raw material cost) and complex fertilizers (ammonia and phosphoric acid) are largely imported due to limited domestic reserves.
For both urea and DAP imports, the Middle East remains an important region, accounting for 40 percent of imports in the first nine months of fiscal year 2026.
For domestic fertilizer production, the dependence on the Middle East is even higher, with 60-65 percent of liquefied natural gas (LNG) and 75-80 percent of ammonia imports coming from the region, it added.
Crisil Ratings said that the reduced capacity utilization is likely to affect profitability, with urea manufacturers likely to experience a greater impact as sub-optimal capacity utilization will reduce energy efficiency.
The industry will require additional subsidy support from the government to mitigate the impact, the report added.
Given the strategic importance of the sector, the government has supported it in the past through increased Nutrient-Based Subsidy (NBS) rates and additional subsidies for DAP manufacturers.
"Taking into account the elevated input costs and imported fertilizer prices for a quarter, the overall subsidy budget is likely to increase by 12-15 percent from the initial estimates of ₹1.71 lakh crore for FY27," said Crisil Ratings Associate Director Nitin Bansal.
"While the government has been prompt in clearing subsidy dues in the past five years, the timeliness and adequacy of subsidy support will have an impact on the working capital cycle of manufacturers. In the interim, manufacturers have adequate liquidity in the form of cash or funded bank lines to withstand temporary cash flow mismatches," Nitin Bansal added.
The ability of fertilizer manufacturers to source key raw materials and fertilizers from alternative sources and government intervention in this regard will be closely watched, the report added.