The Cabinet Committee on Economic Affairs (CCEA) is expected to consider increasing the fixed cost for urea plants and amend the new investment policy (NIP 2012) soon.

“The Fertiliser Ministry has sent two separate notes to the Cabinet Secretariat and it is expected that both of these will be brought for consideration any time now,” an official told Business Line. The proposal to increase fixed cost would not entail any increase in the retail prices of urea. However, this would increase the subsidy burden by around ₹900 crore.

Fixed cost A Group of Ministers recently recommended increasing the fixed production cost for urea plants that are 30 years old or more by ₹150 a tonne, and for all other plants by ₹350 a tonne. Consequently, the minimum fixed cost would be ₹2,300 a tonne. Fixed cost refers to the expenditure on salary and wages, contract labour, repair and maintenance, and selling expenses.

New investment policy Another proposal is related to deleting the word ‘guaranteed buy-back’ from the investment policy. “The Government does not buy fertiliser from manufacturers, so there is no need for assured buying by the Government,” the official said. It may be noted that after a meeting in the Prime Minister’s Office, it was decided to move an amendment in the policy — NIP 2012 — through CCEA for substituting the phrase ‘guaranteed buy-back’ with the expression “subsidies will be given only on domestic sale as at present with proper safeguards.”

The new policy was notified in January 2013 to boost urea production in the country. Urea consumption is around 30 million tonnes, while domestic production is estimated at 22 million tonnes. The difference is met through imports.

The change in the new policy is taking place at a time when gas prices are set to be revised from April 1. However, the official said this had not been factored in the new proposal, as the policy had already prescribed formulae. It has the structure of a flexible floor and ceiling price calculated at delivered price of gas from $6.5 to $14/mmbtu (metric million British thermal units).

The floor price has been determined at a return on equity (RoE) of 12 per cent and the ceiling price at a RoE of 20 per cent. Beyond delivered gas price of $14/mmbtu, only the floor will be increased.

It is expected that approximately ₹25,000 crore of investment by setting up of six brownfield/greenfield projects is likely to be made in the urea sector, which will fill the gap between demand and supply of approximately 8 million tonnes.

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