The Hindu Business Line : Urea ready for more reforms

THE FERTILISER INDUSTRY'S latest "status paper" on urea policy is significant for it recognises the need to compete with imports without any external props. The industry now appears willing, even eager, to make the leap from a cost-plus subsidy regime to a pricing structure that exposes domestic manufacturers to global competition. The Government should seize this opportunity to create the right conditions for the industry to move on to the next stage of reform. Issues such as pricing of feedstock and decontrol of distribution, which have been tossed from one committee to another for too long, should be resolved expeditiously.

The paper puts forward several alternative roadmaps for decontrol. Of this, the one that suggests that domestic urea prices (and subsidies) be pegged to import parity prices appears the simplest, as it would provide enough incentive for producers to tone up their efficiencies to bring them on a par with the most cost-efficient producers from abroad. To align domestic rates with import prices was also the ultimate goal of the group subsidy system suggested by the Expenditure Reforms Commission. The Government can allow producers a limited window of time to switch from alternative feedstock to LNG (liquefied natural gas). During this period, they may be reimbursed for the additional feedstock costs over and above the import parity price.

But a couple of crucial issues will have to be dealt with before domestic urea prices can be brought to import parity levels. The first is to ensure the supply of fertiliser feedstock at competitive prices. While the availability of natural gas has been inadequate to meet domestic requirements, the proposal to substitute this with imported LNG has been hanging fire after talks on the pricing of LNG contracts broke down. The Tariff Commission, which deliberated on this issue, has turned out an inconclusive report. This has now been referred to yet another Inter-Ministerial Group. Since LNG will, in any case, be a more cost-effective option than naphtha (which producers now use as a gas substitute), it is time the industry got back to the negotiating table to strike a compromise on LNG pricing with its suppliers.

To enable producers make the most of market opportunities, the fetters on marketing and distribution of urea should also be loosened. The Government is guilty of dragging its feet on this issue, having recently pushed back the date for a complete decontrol of distribution to the next agricultural season. The issue of gradually raising the selling price of urea to parity with imports may be a sensitive one. Especially when global urea prices are ruling sky-high after rising two-fold in as many years. But this too can be tackled. The options available to shield smaller farmers from price hikes, such as defraying subsidies directly to them in cash or kind, need to be considered seriously. Even the fertiliser industry, which has all along been the vehicle for relaying the subsidy to the farmer, has indicated its willingness to go along with this suggestion.

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