Urea production capacity is expected to increase by 8-10 million tonnes over the next 5 years with the help of the new investment policy that has been approved by the government recently, rating agency ICRA said.
Last month, the Cabinet Committee on Economic Affairs (CCEA) had approved the new investment policy for urea sector.
ICRA said the new policy would incentivise the fertiliser industry to undertake the much-needed investments to boost domestic urea production.
The policy benchmarks realisation of urea for new projects to import parity prices, subject to floating floor and ceiling prices, which are in turn linked to gas prices, the rating agency said.
“It is expected that at least 5-6 brownfield and greenfield projects may materialise over the next 4-5 years, resulting in capacity creation to the extent of 8-10 million tonnes per annum,” ICRA said in a statement.
At present, the country produces 22 million tonnes of urea against the requirement of about 30 million tonnes. The gap is met through imports. Urea sale is controlled by the government with a fixed MRP of Rs 5,360 per tonne.
ICRA noted that the creation of an additional capacity of 10 million tonnes would result in decline in import dependence to 6 per cent of domestic demand by FY2017 from 27 per cent in FY2012.
“While the industry would benefit through implicit pass-through of gas prices while providing reasonable returns and adequate debt-servicing ability, the government would benefit through reduction of subsidy outflows as reliance on imports would reduce and international prices may also correct due to lower demand from India,” ICRA Senior Vice President and Co-Head (Corporate Ratings) K Ravichandran said.
The Centre’s subsidy bill on imported urea stood at about Rs 17,400 crore in 2011-12.
The new investment policy on urea is in line with the demand of the industry to do away with the gas price ceiling of $14/mmbtu in the earlier proposed policy, ICRA said.
Further, the policy also ensures a return of 12-20 per cent on investments in new projects.