The Hindu Business Line : Fertiliser subsidy and costs

This refers to the article `Fertiliser pricing — Time to scrap the archaic scheme' (Business Line, May 12). We would like to clarify that when the system of routing subsidy through industry by controlling farmer price at low level and compensating the industry for the resultant loss was introduced in the mid-1970s, it was done due to the government's inability to disburse subsidy to some 115 million farming families in the rural areas for want of necessary administrative infrastructure, besides entailing heavy cost and leakages.

If now the Government wants to disburse the subsidy directly to farmers, the industry will be too happy to be freed from the strangulating controls and yet being denied its legitimate dues, all to artificially control fiscal deficit. It can then take decisions on its commercial consideration, as other industries do.

The view in the article that there seems no pressure on the industry to reduce costs is far from the facts. There have been continuous efforts by the industry to improve efficiency and reduce cost to keep its nose above water while operating under strict pricing norms. The average capacity utilization of urea plants, for instance, has increased from 87.3 per cent in 1991-92 to 90.2 per cent in 2001-02 and further to 95.5 per cent in 2005-06.

Similarly, the energy consumption per tonne of urea, which constitutes 60-80 per cent of the cost of urea production, has been reduced from 7.14 G.Cal in 1991-92 to 5.95 G.Cal in 2005-06 for gas-based plants. Energy consumption of naphtha and FO/LSHS (fuel oil/low sulphur heavy stock) based plants has also reduced from 8.54 G.Cal to 6.51 G.Cal and 9.50 G.Cal to 7.98 G.Cal respectively. In terms of efficiency, India's urea industry is one of the best in the world, as acknowledged by the Gokak Committee set up by the Government of India.

The observation in the article of the industry getting bonus if it reduces feedstock consumption reaffirms the inbuilt incentive in the system to improve efficiency and reduce costs. The article seems unhappy with the industry's efforts for reducing energy consumption.

The Government has been mopping up the benefits of reduction in energy consumption and improvement in operational efficiency in successive pricing periods by revising the capacity utilisation, raw material consumption and other norms. The capacity utilisation norms for instance, in the NPS III have been revised to as high as 93 per cent for pre-1992 naphtha and FO/LSHS based plants and 98 per cent for pre-1992 gas, post-1992 gas, post-1992 naphtha and mixed energy based plants.

The cost of imported urea for the last three years has been much higher than the weighted average cost of domestic urea. The current CFR cost of imported urea is roughly about Rs14000/tonne and the prices are still rising. Against this, the weighted average cost of domestic urea is only about Rs 10,000/tonne. This means, the domestic industry has been enabling the government to save about Rs 4,000/tonne or so which it would have spent on imported urea in the absence of domestic production. In such a situation, it is hard to accept the view that the industry is gaining at the cost of the exchequer. In fact it is the other way around.

The effectiveness of discontinuing fertiliser subsidy and utilizing that fund for other activities is yet to be tested. Since fertilisers are closely linked to as important an issue as national food security, there is a lot at stake. There hardly seems to be an `either or' type of choice. Both are required for accelerating agricultural growth, one would not yield desired results, without the other. The Government can hardly afford trial and error methods to reverse the trend of prolonged slow down in agriculture which has also been termed as great depression of Indian agriculture, by some economists.

R. C. Gupta

Deputy Director-General Fertiliser Association of India