The increase in export taxes or other export restrictions by a major exporting country reduces supplies in global market. And if demand-supply is balanced, the export tax-induced decline in supplies can heat up the global market place. Under such situation, the costlier imports may swell the subsidy bills of the importing countries.

This in, turn, prods importing countries to resort to tax and non-tax resource mobilization measures since pruning subsidies is politically sticky job everywhere. In both cases, fiscal deficit always creeps up.

This challenge stares India as well since India subsidizes all these commodities in a big way, thereby running huge fiscal deficit year after year.

This export taxation-subsidies correlation can be illustrated by taking up the case of India and China. The former is one of the world's largest importers of fertilizers and the latter is a ‘swing exporter' of fertilizers with export volumes calibrated by variable export taxes that are 100%-plus for periods when domestic demand for fertilizers is at its peak.

Both the absence and the presence in global exports markets for nitrogenous and phosphatic fertilizers serves as driver of prices. Experience shows that export tax-enforced steep cut in export of these commodities increases the prices in the international market. China's export taxation is thus one of the significant factors contributing to rise in the Indian fertilizer subsidy.

What applies to fertilizers today would also apply to power generation sector in the coming years with increased dependence on imported coal. Some of the countries such as Indonesia and Australia have unveiled proposals to increase levies on exports and put certain non-tariff curbs.

As the power generating companies struggle to pass on the increase in the price of imported coal to distribution companies and ultimately to consumers, the state or provincial governments would have no option but to absorb a part of the power shock in the form of enhanced electricity subsidy to farmers and poor people.

Some of the promoters of imported coal-based mega power projects, who bagged projects under electricity tariff bidding, have now expressed their inability to honour contracted tariff due to steep increase in fuel prices.

What applies to India must also apply equally to the be hurting other import-dependent countries. Or else, why should other member countries of the World Trade Organization (WTO) crib at tariff and non-tariff restrictions imposed by China? According to the minutes of trade policy review (TPR) of China organized by WTO in June 2010, “Members remained concerned over certain aspects of China's export regime, notably, restrictions, licensing, quotas, export taxes, and partial VAT rebates. Its export barriers have not been falling at the same pace as its import barriers, and could potentially distort markets.”

WTO Secretariat itself has voiced concern over Chinese export restrictions including taxes on fertilizer exports. In its TPR report on China, the Secretariat notes: “export restraints for whatever reason tend to reduce export volumes of the targeted products and divert supplies to the domestic market, leading to a downward pressure on the domestic prices of these products. The resulting gap between domestic prices and world prices constitutes implicit assistance to domestic downstream processors of the targeted products and thus provides them a competitive advantage. Insofar as China is a major supplier of such a product, export restraints may also shift the terms of trade in China's favour. Also, some export restrictions might be imposed to pre-empt imposition of import restrictions by governments in export markets.”

China started levying export taxes on fertilizers in 2008. The tax rate is highest for the peak season and lowest for the lean seasons in the domestic market. It imposes and adjusts export taxes to ensure adequate availability of nutrients to farmers and prevent rise in domestic prices, thereby safeguarding its food security.

The Sino-India fiscal matrix might well become a factor in bilateral dialogues with India's unabated dependence on imports.

Fertiliser Association of India (FAI) Director General Satish Chander, however, views the issue from a positive perspective. He points out that in the eighties and nineties, both India and China were major urea importers. The global prices used to flare up when the two countries used to enter the markets around the same time. China's transformation from importer of urea and DAP to an exporter has reduced pressure on global prices. India has thus benefited fiscally from China's export of surplus output of fertilizers.

China and India, which were once in the same import boat, are today poles apart in production of fertilizers.China has vigorously followed a policy of self-sufficiency and heavily relied on coal as feedstock for urea, whereas India has been obsessed with gas as feedstock, which is permanently in deficit. Not a single new urea plant has come up since 1999 for want of gas as well as Government's bias perception that urea industry is drain on the exchequer. It believes that it can reduce subsidy bill by banking on imports. The more influential gas consumer, the power sector, has also successfully marketed the idea in Government corridors that power cannot be imported but urea can be. Hence, first allocate gas for electricity generation.

After a brief 22-months spell of no urea imports, India re-entered the global market for shopping in the last quarter of 2001. The country's dependence on imports has been growing by leaps and bounds since then. The country's urea imports during 2011 are estimated at 6.7 million tonnes. According to Potash Corporation's fourth quarter market report, India's import demand is close to 18 percent of global urea trade. Imports are expected to breach 7 million tonne mark in 2012. India is currently the world's largest importer of urea, the most popular and over-subsidized fertilizer in the country. India is also the world's largest importer of diammonium phosphate (DAP) and its substitute mono ammonium phosphate (MAP).

China, on the other hand, transformed itself from a major urea importer in the nineties to an exporter in 2000. China's urea exports shot up from less than half a million tonnes in 2002 to about 7 million tonnes in 2010. China became net phosphates exporter in 2007. No global player can afford to ignore China's nitrogenous and phosphatic surplus output as a driver of global prices.

As put by Russia's 'Phosagro' in its global depository receipts prospectus issued in July 2011, “Originally China was the world's largest importer of DAP/MAP until the mid-1990s when the Chinese government implemented a policy aimed at China becoming self sufficient in phosphate fertilizer production, based on its large phosphate rock resource base. In a decade China went from being an importer of over 5 million tonnes of (largely United States) DAP per year, to being an exporter of 2-4 million tonnes depending on the government's export duty system.”

Phosagro is now edgy at the capability of Chinese firms to serve Indian DAP market. It says that Saudi Arabia upcoming Ma'aden DAP plant and Chinese producers may be able to offer lower prices to Indian customers as they enjoy freight advantage over it. In such a situation, Phosagro would be have to dcrease its fertiliser prices or cause a decrease in its revenue, it adds.

Describing China as a ‘major swing factor for global urea trade', PotashCorp report notes that China's r ecord urea export in 2010 “prompted further policy revisions that constrained the 2011 low-tax period to only four months during the summer. The current export tax is set at 7 percent during the off-season and 110 percent during the peak season. November 1 marked the end of the low-tax period so significant volumes from China in November and December are unlikely. Total 2011 exports are projected to be less than 2.8 million tonnes.”

Norwegian Fertilizer giant Yara has also factored in the impact of export tax-induced reduction in China's urea exports on global prices in its presentation issued on 6 December.

Yara says: “In 2011, the market dynamics have been very different. Supply has been restricted by reduced Chinese exports, less spare capacity in the industry, and limited capacity additions. Given continued strong demand development, prices increased sharply from 2010 to 2011 to balance the supply-constrained market. The average 2011 price will be close to USD430/mt, up almost 50% from 2010.”

The upshot of increase in urea and DAP prices and reduced Chinese exports is that Indian Finance Ministry has been forced to seek Parliament's nod for increase in earlier approved fertilizer subsidy to Rs 676.16 billion from Rs 538.37 billion for current fiscal year ending 31 March 2012. Some analysts believe that the revised provision is inadequate and the total subsidy bill might ultimately shoot up to Rs 800 billion or more. India's fiscal woes as well as hardened global prices due to reduced Chinese exports underscore the importance of India's dependence on China for reining its fiscal deficit and for improving its food security.

At the China's TPR meeting at WTO last year, Indian representative stated: “ In India, China's growth story is a continuing theme of interest, narrated with great interest and admiration. As economic partners, we continue to learn from each other.”

Does Indian Government have any desire to learn lessons from China in the field of fertilizers or would it just hope for further reduction in China's export taxes?