The Hindu Business Line : Fertilisers impasse

THE STAND-OFF BETWEEN the fertiliser industry and the government on the issue of pricing of inputs needs to be resolved before it can inflict further damage on the farm sector. Production of phosphatic fertiliser for the ongoing kharif season is said to be a good 20 per cent short of target. With the government refusing to accept the actual contracted price of phosphoric acid — a key input, for computing the subsidy payable to producers — the latter are now threatening to shut down operations. Since last year, when phosphoric acid prices started their relentless climb, the Government has repeatedly pushed producers to clinch their import deals at $356 per tonne, when suppliers were unwilling to offer it at anything less than $400 per tonne. The subsidy, which compensates producers for the deficit between their production costs and fixed selling prices, has been computed using the former price; which producers claim is too low to allow viable operations.

Given that most elements of cost for producers are passed on to the government by way of the subsidy, it is not wrong to encourage the industry to drive a hard bargain on procurement prices through concerted negotiations. But to insist that contracts be clinched at a specific price — that too, in a market where shortages and inflation rule — is to ignore the ground realities. This impasse would be easily solved if the Government could peg up the selling prices of fertiliser products, at least a little, to pass on some of the steep spiral in prices of fertiliser materials to the consumers — farmers. But having ruled out such a course of action, there appears to be no option but to absorb the price rise and pay a higher subsidy. With global prices of the finished product shooting up in tandem with input prices, the import option too is not cost-effective.

This is not to say that further savings cannot be tweaked from the subsidy bill, even in an inflationary environment. For one, the government can peg the concessions to an accepted global benchmark price for each input. This will ensure that supply contracts are clinched at fair prices, without the government getting involved in negotiations between the industry and its suppliers each time a deal is struck. Long-term supply arrangements for inputs should also be examined. Setting up of manufacturing facilities through the joint venture route in resource-rich countries should be encouraged as these can tap into feedstock at more reasonable prices. Backward integration projects which allow producers to make intermediate products such as phosphoric acid and naphtha could also provide some protection against swings in material prices. Producers will still depend on external sources for basic raw materials such as rock phosphate and ammonia/LNG but experience suggests that these prices could be more stable than those of intermediates.

Finally, having set a transparent benchmark for determining input prices, the government could ask producers to strive towards pre-determined norms on conversion and energy efficiency, on the basis of which the subsidy will be worked out. Such a system is in place for urea and has encouraged producers to generate significant cost savings. These moves may help soften the impact of rising commodity prices on the subsidy bill, without frequent face-offs between the industry and the government.

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