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NEW DELHI, Jan. 27

THE introduction of drastic changes in the urea pricing policy parameters being contemplated by the Government has the domestic nitrogenous fertiliser industry on tenterhooks.

The proposed changes pertain to the 7th and 8th pricing periods (1.7.97 to 31.3.2000 and 1.4.200 to 31.3.2003) under the existing retention price scheme (RPS) or earlier, if a new policy not based on unit-wise RPS is introduced by then.

The RPS, operative since 1977 through a system of three-yearly pricing periods, has, in a way, been in the backlog since the 6th pricing period (1.4.91 to 31.3.94) as it was ``arbitrarily'' extended by two years up to March 31, 1996, and thereafter again for a period of 15 months up to June 30, 1997.

Since then, there has not been any new notification and the Fertiliser Industry Coordination Committee (FICC) has continued to fix the retention prices on the basis that existed for the 6th pricing period.

According to industry sources, the Department of Fertilisers has now prepared a policy note proposing major changes in the scheme and this is likely to come up before the Cabinet Committee on Economic Affairs (CCEA) for approval very shortly.

The policy note, among other things, has proposed a revision in the norms of consumption by urea plants by way of raw materials, utilities and other inputs that are taken into account while fixing the retention price for each plant. Industry sources point out that already, consumption norms have been revised for 13 units on an interim basis with effect from April 1, 2000.

In such a situation, the industry feels that yet another revision in the consumption norms will essentially hurt only those units who have further improved over these norms after they were fixed while it will not adversely affect those units which have not cared to improve their manufacturing efficiencies.

The Department's policy note has also proposed withdrawal of the vintage allowance that was given to the old urea units to compensate them for the handicaps vis-a-vis the newer units. While this allowance was introduced through a Cabinet decision in the late eighties, it is now sought to be withdrawn despite the fact that vintage and resultant handicaps have only increased with the passage of time.

The policy note awaiting approval by CCEA has also proposed reassessment of the manufacturing capacity of urea plants that is in supercession of the Alagh Committee recommendations on the same issue. On the face of it, the industry finds this move unfair for certain units, especially those which are very old and have only a limited years of life left.

For instance, the capacity of a 32 year-old plant has been reassessed from 6.75 lakh tonnes per annum (tpa) to 7.22 lakh tpa, ignoring the fact that the licensor's nameplate capacity is only 6.75 lakh tpa and it was designed and installed much before the introduction of the RPS.

According to Mr Viren Kaushik, Managing Director, Duncans Industries Ltd (Fertiliser Division), implementation of these drastic changes will have a serious debilitating effect on the urea units and push several of them towards sickness and eventual closure. Besides, as the changes in policy parameters are to take effect retrospectively from July 1, 1997, the resultant heavy recoveries for the past period too, will lead to an immediate cash flow crisis and consequent closure.

Mr Kaushik told Business Line that the contemplated changes would lead to 16 urea plants slipping into the red and eventual closure. And, as these units account for about 50 per cent of the country's total urea production capacity of 20.8 million tonnes, the annual production of urea would decline by about 10 million tonnes.

Thus, apart from the 10 million tonne shortfall, another 5 million tonne additional demand by the terminal year of the Tenth Plan, or 15 million tonnes in all, would have to be made good through imports.

This, Mr Kaushik said, would lead to a situation where the Government would end up spending much more by way of subsidy on imported urea and thereby primarily increase the profits of global suppliers at the cost of the domestic industry.

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Retention price: Govt move keeps urea units on tenterhooks

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