Urea pricing – Government must walk the talk

About six months back, the Committee of Secretaries (CoS) had recommended that the MRP of urea be raised by 10 per cent. However, this was stoutly opposed by the Fertiliser Minister. Even the Agriculture Minister, who is Chairman of the Group of Ministers on urea pricing and other related issues, is not favourably disposed towards this proposal.

However, Prime Minister Dr Manmohan Singh is keen to accept the CoS recommendation. Having taken some baby steps (diesel price, etc), he would like to do more to bolster the reform credentials of the UPA Government.

POLICY STEPS

For close to five decades, the Government has kept urea under pricing and distribution control. In the 1950s and 60s, it operated a Central Fertiliser Pool (CFP). All material procured – from domestic and import – was put in CFP and given to State agencies for distribution.

Based on the Sivaraman Committee (1965) recommendations, controls were removed in 1969. However, these were resurrected but under a new form. In 1972-73, Govt started regulating distribution, movement and use under Essential Commodities Act. The system continues till date.

Until the early 1970s, the cost was low and was fully covered by MRP. Following the oil price spurt in 1974, import costs zoomed, exceeding MRP. The Government made up the resultant loss by collecting a cess, called Fertiliser Pool Equalisation Charge (FPEC), from domestic manufacturers, whose cost was still lower than MRP.

Meanwhile, the cost of domestic urea too was increasing and threatening to exceed MRP (reduced progressively till 1979). The Government not only had to abolish FPEC (1980) but was also forced to take long-term measures to protect and encourage domestic industry – despite the need to keep MRP low.

Based on the recommendations of the Marathe Committee (1976), it introduced the erstwhile retention price scheme (RPS) in 1977 (DAP and complex fertilisers were covered in 1979). Under RPS, it reimbursed to producers the excess of cost over MRP as subsidy.

Although the RPS was abolished in 2003, the system of reimbursing the excess of production and distribution cost over MRP to urea manufacturers has continued till date. The New Price Scheme (NPS) under which this is being done, is nothing but ‘old wine in a new bottle’.

FISCAL CONSOLIDATION

The RPS/NPS creates a sort of ‘China Wall’ between producers, and consumers or farmers. Farmers are totally immune to what happens to costs. For decades, they are accustomed to a low price of urea, thereby resorting to indiscriminate use.

Producers, too, need not worry about rising cost as under RPS/NPS, the Government is obligated to give them full compensation for all costs incurred, plus a guaranteed return on investment.

But, all this comes at a heavy cost to the exchequer. Fertiliser subsidy, which was Rs 500 crore in 1980-81, increased to around Rs 4,400 crore in 1990-91, crossing Rs 10,000 crore by 1998-99.

In the next decade, it zoomed to Rs 96,000 crore by 2008-09. After dipping somewhat in the following 3 years, during current fiscal it will again touch Rs 100,000 crore.

The Government considers this to be a serious threat to its ‘fiscal consolidation’ efforts. Having already revised its initial fiscal deficit target for current fiscal from 5.1 per cent to 5.3 per cent, it is no mood to permit any further slippage. But what is it doing to walk the talk?

The goal cannot be achieved merely by denying to the Department of Fertilisers (DoF) additional funds (around Rs 40,000 crores) over the Budget allocation of Rs 60,000 crore. DoF has been asked to arrange for loan of Rs 25,000 crores from banks, which simply postpones the problem to next year!

The Prime Minister has categorically stated that prices of oil and oil-based products should be linked to international prices. The Rangarajan Committee has recommended that price of domestic gas should be linked to a basket of global prices from four sources. If adopted, this would result in near-doubling of prices.

Under the new Urea Investment policy (UIP), Government proposes to allow cost reimbursement to greenfield projects linked to an import parity price (IMPP) of $305-335 per tonne, based on a gas price of $ 6.5 per mmBtu plus $ 20 per tonne for each dollar per mmBtu increase in price up to $14 per mmBtu.

The cost of a new urea plant could thus go up to $485 per tonne or an astronomical Rs 30,000 per tonne.

Already, the cost of imported urea to farmers works out to around Rs 30,000 per tonne.

The cost of domestic urea, though lower at around Rs 15000-20,000 per tonne, too, is substantially higher than MRP.

As for MRP, the Government has been able to raise it only twice in last decade. In April 2010, it raised the price by10 per cent from Rs 4,830 per tonne to Rs 5310 per tonne.

A few months ago, it revised the price by Rs 50 per tonne to Rs 5,360 per tonne. The price is a third of the cost of domestic urea and about a sixth of the cost of imported urea.

Even if MRP is raised by 10 per cent per annum, it would take a minimum of 10 years for gap between cost and price to be eliminated, if cost stays at current levels. With costs heading north, we would be looking at a much longer time horizon for the subsidy to go away.

Thus, policymakers are not addressing the urea subsidy imbroglio. Currently about Rs 60,000 crore, this will only leapfrog in absence of credible initiatives.

REDUCE IMBALANCE

Urea de-regulation seems a distant cry. However, the least the Government should do is to put in place Nutrient Based Scheme (NBS) – on same lines as DAP/complex fertilisers – and fix subsidy in a way that urea MRP gets aligned with other fertilisers (at present, latter are more than 3 times expensive than former).

That will yield a huge saving in subsidy; rein in indiscriminate use of urea; reduce imbalance in NPK use ratio; restore soil health and improve agricultural yield.

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