The Hindu Business Line : Trapped in a protectionist mindset

The freeing of exports of DAP, SSP and, to a limit, urea by the recent Exim Policy might seem like a major step in fertiliser sector liberalisation. But it will make little difference on the ground. For liberalisation in the fertiliser sector to be meaningful, the Government should come out of its present "protectionist" mindset and undertake a complete overhauling of the pricing and subsidy system.

IN THE recently announced Export Import Policy, the Government has allowed free export of di-ammonium phosphate (DAP) and single super phosphate (SSP) (imports of these fertilisers were freed in 1992). It has also allowed export of urea up to a maximum of 5 lakh tonnes.

These announcements may seem to give an impression that the Government has taken a major step forward in liberalising the fertiliser sector. But closer scrutiny reveals that the situation on the ground will remain fundamentally unaltered. A brief historical perspective will help put contemporary realities in perspective.

Pre-liberalisation, the Government controlled the distribution of all fertilisers as well as their selling prices. The cost of production and distribution being higher than the selling price, the Government compensated the manufacturers for the difference as subsidy on a unit-specific basis.

Exim policy in perspective

As regards international trade in fertilisers, while exports were prohibited, the Government — through its agencies MMTC, STC, etc. — arranged imports only to the extent of filling the gap between domestic production and demand. In other words, imports were treated as "residual". The imports of raw materials used in the production of fertilisers were also controlled and allowed only through government agencies.

Since the C&F landed price and the handling and distribution costs of imported fertilisers were also higher than the selling price, the Government incurred subsidy on import as well. The subsidy payments on both domestic fertilisers and imported fertilisers were met from the Union Budget.

In the early 1990s, following the commitments given to the IMF/World Bank (these institutions were approached to bail us out of the precarious BoP situation), the Government removed pricing and distribution controls on all phosphate fertilisers and withdrew the system of unit-specific subsidy payments. The controls on their imports were also removed and import of raw materials used in their production freely allowed.

For urea, however, controls and the unit-specific subsidy scheme were retained . The controls continued up to March 31, 2003, after which distribution controls were partially lifted and the unit-specific subsidy was replaced by a group concession scheme.

Faced with a situation of steep increase in the selling prices of phosphate fertilisers, in just a month after the announcement of decontrol, the Government resurrected subsidy in its new avatar — concession support. The concession was "uniform" instead of unit-specific under the earlier dispensation.

In lieu of concession, the Government decided to control the selling price as well, and the same position has continued since. It also continues to regulate imports — albeit indirectly — despite the de jure full freedom of import allowed since 1992. This is how it has managed the show.

Under the concession scheme, initially, the concession on both the domestic DAP and imported DAP was allowed at the same level. But this was only for a brief period of six months — October 1, 1992 to March 31, 1993. From April 1, 1993, the concession on imported DAP was withdrawn. In July 1996, the concession on imported DAP was restored but kept at a level significantly lower than on domestic DAP. This relative position has been maintained till to date, though the differential varied from year to year. This sole purpose of this arrangement has been to nullify the inherent cost advantage of imported DAP.

In view of above and since the eligible concession amounts are determined by taking in to account the actual cost of supply from the respective source, the inherent advantage of the importer is completely offset. This way, the Government is able to regulate the quantum of imports even while giving an impression that there are no quantitative restrictions.

Cost handicap

The freedom of exports promised in the Exim policy cannot also be viewed in isolation from the cost handicap of the domestic industry. When the domestic industry needs sops to survive on the home turf, how can it compete in the international market? In this backdrop, export liberalisation too would remain only on paper!

Coming to SSP, despite the critical importance of SSP to Indian agriculture, it has been meted out a discriminatory treatment. SSP contains 16 per cent of P nutrient or about a third of the P nutrient in DAP (46 per cent). And, yet the former get only a quarter of the concession given to the latter. This has led to a steep decline in the production/consumption of SSP during the last decade or so.

In view of the above and having progressively impaired the ability of the SSP industry to effectively serve the domestic market by a discriminatory policy environment (already, a number of SSP units have downed their shutters), it would be illogical to expect it to deliver in the international market!

In the urea segment, the Government continues to control the selling price. Further, through subsidy payments under the concession scheme, it continues to protect the much higher production cost of majority of the units above the import parity price (IMPP) of urea.

Though, technically, QRs on urea imports were removed from 1.3.2001, the Government continues to regulate these by insisting on import only through designated state trading enterprises (STE).

Significantly, the Government does not allow any subsidy on imported urea. In view of this, even if the condition of import through STE is withdrawn, it would still be able to prevent imports as at the low controlled price (this is an artificial price totally divorced from the cost considerations or market forces), the realisation will be totally inadequate to cover the cost. As regards export, the Exim Policy allows this up to a maximum of 5 lakh tonnes, which is peanuts in a total production of over 200 lakh tonnes. Even for this, the manufacturers are required to take prior permission of Department of Fertilisers and have to surrender a part of the proceeds to the Department as per an agreed formula!

That apart, with majority of the domestic manufacturers producing at cost higher than the international price of urea (thanks to the high level of support under the administered price regime), how can they be expected to perform in the world market?

Liberalisation: The way to go

For liberalisation in the fertiliser sector to be meaningful, the Government should come out of its present "protectionist" mindset and undertake a complete overhauling of the pricing and subsidy system.

The differential concession scheme for DAP should be replaced by uniform concession for all benchmarked to IMPP of DAP. The concession on SSP should be linked on a proportionate nutrient basis to the concession on DAP. If the concession on DAP is X, on SSP it should be a third of X. While making space for low-cost imports, this would force domestic manufacturers of DAP to make efforts to procure raw materials particularly phosphoric acid at competitive prices and thus lower their production cost. This will also give a fair chance to SSP units to compete in the market place.

The group concession scheme for urea should be replaced by a uniform concession for all units linked to its IMPP. The existing system of import through STE should be dismantled and free import allowed by any one. This will make way for low-cost import and push domestic manufacturers into cost reduction mode.

The export of urea should be freely allowed without any encumbrances viz., prior permission, sharing of proceeds, quantity ceiling etc. This will enable the low-cost producers to take full advantage of the opportunities in the international market place. The Government should carry out these long-pending reforms in the fertiliser sector proactively instead of waiting for the exporters to crack the whip by challenging our policy dispensation at the WTO.

(The author, an economist, is an expert on fertiliser policy. Feedback may be sent to uttamgupta2003@yahoo.co.in)

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