The Hindu Business Line : Fertiliser policy — Must be a nutrient for food security, competitiveness

Instead of addressing the issues of price decontrol, subsidy phase-out, promotion of gas-based plants and restructuring inefficient naphtha-based units, successive fertiliser policies have focussed too much on controlling costs and margins, resulting in stagnant production and many units turning sick. A mindset change is urgently needed.

Now that the Eleventh Plan is under way, it is time to take stock of the reforms planned for the fertiliser sector at the start of the Tenth Plan and what has been achieved so far. The country's current fertiliser production is about 35 million tonnes. It is estimated that about 55 million tonnes of fertiliser products will be needed by the end of Eleventh Plan period. This leaves a huge gap of 20 million tonnes to be met through imports. This will put the country's food security at grave risk. The fertiliser industry, once a core sector, has taken a back-seat. The Tenth Plan (2002-2007) witnessed a very slow growth (just about 2 per cent) in the agricultural sector and failed to achieve the target of 4 per cent set in the National Agricultural Policy 2000. The Tenth Plan period also witnessed, after several years, large-scale fertiliser imports to meet domestic demand. Foodgrains production too fell well below the requirement and the country had to resort to imports.

All this calls for a quick overhaul of the fertiliser policy. The main goals of the policy revamp should be:

To benchmark the fertiliser sector against international best practices and suggest measures to make domestic industry globally competitive;

To review the fertiliser pricing policy and suggest modifications to it, including the feedstock policy, so that the sector becomes compatible with WTO provisions, paving the way for gradual elimination of subsidy.

To assess the financial strength of the fertiliser industry in the public, co-operative and private sectors and estimate the investment required and the sources of investments; and

To assess the investments, year-wise, to be made in the public, co-operative and private sector fertiliser companies for augmentation of capacity, modernisation and upgradation of technology, including the shift to gas-based production by the naphtha/fuel oil/Low Sulphur Heavy Stock (LSHS) units and the phasing of such investment.

Heavily controlled

A decade and a half since the liberalisation process began in India, the fertiliser sector is even now the most controlled industry. The government sets concession prices, and the maximum retail price (MRP) for farmers, and dictates how much to produce, and where to sell. Pricing policies are governed under the provision of the Essential Commodities Act (ECA) 1955, and the Fertiliser (Control) Order (FCO), 1985.

The policy-makers should plan for long-term foodgrains output increase to meet the domestic demand and exports.

The policy should also emphasise balanced fertilisation to preserve soil health and nutritional value of foodgrains, besides making adequate availability of fertilisers to farmers at economic prices and ensuring distribution of subsidy directly to the farming community. Healthy growth of the fertiliser industry to achieve global competitiveness should be one of the main policy planks.

The outcome of successive policies pursued so far has been an agriculture growth rate hovering around 2 per cent. Soil health has been affected leading to a decline in productivity over time due to imbalanced use of fertilisers. The nutrition content of the food is lower as a consequence.

Subsidy payment

The subsidy, which is the difference between the concession price and the government-determined MRP meant for farmers, is now routed through the fertiliser companies for administrative convenience.

The payment of subsidy directly to the farmers has never been attempted on the pretext that this involves developing an effective distribution system to reach a large number of beneficiaries. But effective distribution is now a distinct possibility in view of the technological developments that help capture more data.

The use of IT in the fertiliser sector will, however, have to be made more interactive, informative and user-friendly, with the well-coordinated efforts of various organisations and agencies.

Ironically, instead of addressing these factors, successive policies have concentrated on controlling costs and margins in the industry with no real control on the subsidy bill, resulting in virtually no growth in the fertiliser industry with production capacities remaining stagnant since 1999. This has reduced the sector to a laggard in the capital market, drawing little interest from domestic or foreign entrepreneurs, or the general public.

Profitability

Over time, even well-performing fertiliser units have become unprofitable, with some units turning sick and closing down. One reason is that the policy for existing units is markedly different from that for new ones. Even if there is a positive policy for new units and the factories being expanded, it will not attract investments because of the inherent instability in the policy environment.

All too often, once investments are made, policies have been changed adversely for the industry. It goes without saying that, in any industry, the stakeholders look to significant profits for sustenance and growth after the initial investment is recovered.

Successive government policies have, however, drastically reduced the profits of the fertiliser industry. This has led to inadequate surplus generation for investment in modernisation and expansion of existing units.

The policymakers' mindset has to change to create an environment where the industry is motivated towards development of new products based on soil and crop requirements; for instance, the fortification of fertilisers with the appropriate micronutrients and customised inputs.

While such products may be approved by the Government, the price should be determined by free market forces of demand and supply. The manufacturers should be allowed to charge appropriate prices based on commercial considerations.

The MRP was fixed by the Centre almost five years back. Only a phased increase in the MRP, based on well-established norms, will strengthen the industry and the farm sector.

Pricing pattern

The farmgate price of the main nutrients — N, P and K — should normally remain the same in all fertiliser products, irrespective of the product/technology involved; sulphur needs to be recognised as a critical nutrient, on a par with N,P,K for both price-fixing and eligibility for subsidy. Similarly, subsidy also needs to be extended to micronutrients to ensure their optimum utilisation by the farmers to address deficiencies in the soil and sustain balanced fertilisation.

Gradually, the pricing policies should come in line with the liberalisation and globalisation measures initiated in 1991. The Government, in the long run, should aim to decontrol the industry to ensure that it attains global competitiveness.

The policies should have a long-term perspective instead of the kind of short term and knee-jerk approach seen in recent years.

The Government, in its proposed Stage III of the Urea Pricing Policy, has envisaged some incentives for creation of additional capacities through revamps, as also brownfield and greenfield expansion at locations where adequate gas is available at reasonable prices. However, this is possible only if the government offers the industry attractive incentives and adequate returns for additional investment in these projects.

The Government must work out a long-term plan that will take care of the interests of the domestic industry, farmers and the diversification of agriculture. The long-term objective of this policy should be to decontrol prices, end subsidies, promote gas-based plants and restructure inefficient naphtha-based units.

(The author is a Senior Under-Secretary in the Department of Agriculture and Cooperation, Ministry of Agriculture, New Delhi. The views expressed are personal.)