A smaller subsidy would push up costs in India, dashing any hopes for a recovery in demand in one of the world's top importers of the fertiliser that global potash miners are banking on to counter a slump in prices.
Russia's Uralkali broke away from trading venture Belarusian Potash Company (BPC) in July, sending potash prices down more than 20 percent since then to around $310 a tonne.
India relies on imports to meet its entire potash demand, which in the current year is 4 million tonnes. Over the past five years it has accounted for about a tenth of global shipments, although its share has been slipping as local prices rise on previous subsidy cuts and on a weaker rupee.
Major suppliers to India include Potash Corp of Saskatchewan , Mosaic Co, Agrium Inc, Uralkali, Arab Potash Co, Israel Chemicals and Germany's K+S AG.
India's fertiliser ministry has set the subsidy at 9,300 rupees ($150) per tonne for next year, said a fertiliser ministry official, who declined to be named. For the year ending March 31 the subsidy was fixed at 11,300 rupees per tonne.
"The proposal is with the cabinet and will be cleared in the next meeting," said another government official, who takes part in negotiations with overseas suppliers. The officials said the proposal could be cleared in a week.
Retail potash prices in India have doubled since 2011 to 17,000 rupees a tonne as India cut subsidies in the last two years, including a 21.5 percent reduction in 2013/14, and due to a weak currency.
Higher retail prices have already reduced India's annual potash imports from 6.3 million tonnes in 2010/11 to 4 million tonnes in the current financial year to end-March, according to the Fertiliser Association of India (FAI).
Leading producers Uralkali and Potash Corp declined to comment on the impact of a subsidy reduction on their exports.
A senior potash industry source said Indian farmers have always responded negatively in their application of potash, when subsidy adjustments led to higher prices.
"I would assume that this will also happen this time. This especially since the devaluation of the rupee will have already partially offset the reduced (US dollar) world market prices," the official said.
Bill Doyle, chief executive officer at Potash Corp said on Wednesday that he expected an increase in total Indian potash imports in 2014 due to its lower stockpile.
Shares of North American producers Potash Corp, Mosaic and Agrium, were all slightly lower on Thursday morning.
SLOWING ECONOMY
Since the breakup of BPC, the world's top potash producer Uralkali has been ramping up production to compensate for a drop in prices and is on the hunt for buyers such as India to absorb incremental supplies.
But India, which has been struggling to contain food, fuel and fertiliser subsidies amid a slowdown in the economy, may not be able to soak up the supplies as it can ill afford current subsidy levels.
Finance Minister P. Chidambaram allocated 679.71 billion rupees for the fertiliser subsidy in 2014/15 in the interim budget presented last week, as he tried to bring down the fiscal deficit.
The subsidy is not enough as the government has already deferred a payout of around 360 billion rupees from the current year to next year, said Satish Chander, director-general of the FAI.
"There is no room to reduce retail potash prices considering the lower subsidy and weak rupee. There will be destruction in demand," said an official at state-run Rashtriya Chemicals and Fertilizers Ltd (RCF).
