The Hindu Business Line : Fertiliser sector gives thumbs up to change in subsidy regime

New Delhi, July 6 The fertiliser industry has cautiously welcomed the Finance Minister, Mr Pranab Mukherjee’s Budget proposal to move from a ‘product-based’ to a ‘nutrient-based’ subsidy regime along with disbursing the subsidy monies directly to the farmers.

The move is aimed at inducing companies to broaden their production portfolio and offer customised ‘value proposition’ products to farmers.

Market viability

Currently, there are 90-odd products listed under the Fertiliser Control Order, though in practice hardly 15 are effectively sold in the country. These include urea, di-ammonium phosphate (DAP), Muriate of Potash (MoP), single super phosphate (SSP) and 11 complexes with defined nitrogen (N), phosphorous (P) and potassium (K) contents.

“In the present regime, it is viable to market only the 15 fertilisers, since the Government grants subsidy only on these (by footing the difference between the controlled sale price and cost of production). There is nothing stopping companies from making other fertilisers, but these cannot compete with the subsidised products in the market,” industry sources said, pointing at the example of urea.

The sale price of urea, which contains 46 per cent ‘N’, is now fixed at Rs 4,830 a tonne. That translates into Rs 10,500/tonne of nutrient. As against this, ammonium sulphate, a decontrolled fertiliser with 20.6 per cent N, retails at over Rs 10,350/tonne. The cost of delivering one tonne of N through ammonium sulphate, thus, comes to over Rs 50,000 a tonne, rendering it uncompetitive vis-À-vis the highly subsidised urea (despite it containing 24 per cent of sulphur, an additional nutrient).

“The system, the way it is forces farmers to consume ‘N’ solely in the form of urea, just as ‘K’, can be delivered only through MoP. Nor do companies have the incentive to launch niche fertilisers or incorporate micronutrients and other improvisations to existing ones. If the objective is to provide nutrients for healthy plant growth, it should be left to the companies to design products to suit different soil-moisture environments and crop requirement,” the sources noted.

“We welcome both the decision to move to a nutrient-based subsidy regime as well as delivering the subsidy directly to the farmer rather than routing it through industry,” said Dr U.S. Awasthi, Managing Director, Indian Farmers’ Fertiliser Cooperative (Iffco).

The industry sources, however, pointed out that the Mr Mukherjee’s proposal is only a “statement of intent”. The details of how exactly the transition to the new regime would take place will have to be worked out by the Department of Fertilisers. “We don’t see the new regime kicking-off immediately,” they added.

Fertiliser subsidy

Meanwhile, the Union Budget has allocated Rs 49,980.25 crore as the fertiliser subsidy for 2009-10. This is half of what was spent last fiscal, of which over a fifth was in the form of ‘special securities’ issued to fertiliser companies. The companies receiving the bonds had to sell these bonds (often below face value) to banks to meet their liquidity requirements.

“The good news is that the entire subsidy this year will be given as cash. The lower subsidy estimate is based on the assumption that international prices of both finished fertilisers and intermediates will rule soft,” the sources noted.

The landed price (cost & freight) of urea is currently ruling at $275-$280 a tonne, after scaling levels of $800 a tonne last September.

Naphtha, which is a feedstock for manufacturing urea, has eased to Rs 32,000 a tonne, having scaled Rs 55,000-plus last July.

Imported DAP prices have also fallen to around $350 a tonne (from the peak $1,305 in September).

Phosphoric acid, a key raw material for manufacturing DAP, had touched $2,310 a tonne in June, whereas it is now at more manageable $508 a tonne.