Funds-starved industry seeks urea decontrol

For fertiliser firms, the main problem today is one of liquidity arising from inadequate provision and delayed disbursement of subsidy by the Centre.

The Interim Budget for 2014-15 has provided ₹67,970.33 crore towards fertiliser subsidy. But of this, about ₹35,000 crore relates to payments for 2013-14 carried forward to this fiscal.

That leaves barely ₹33,000 crore to meet the current year’s requirements. Take the case of urea. Indian firms produce around 23 million tonnes (mt) of urea annually. While the average concession rate covering production costs is roughly ₹16,000-16,500 a tonne for gas-based plants, the corresponding MRP for urea fixed by the Centre is ₹5,360.

Inadequate and delayed Thus, the annual subsidy requirement – the gap between the concession rate and MRP – for domestic urea alone comes to about ₹25,000 crore, which cannot be met by the ₹33,000 crore effectively provided for in 2014-15. This is because domestic urea accounts for only 40-45 per cent of the total subsidy provision; the remaining is on account of imported urea and other fertilisers. Besides inadequate provision, the Centre has lately resorted to unconventional methods to meet subsidy obligations, including through Special Banking Arrangements (SBA).

This involves allowing firms to borrow from public sector banks against their subsidy receivables at 10.25-10.4 per cent interest, with the Centre providing subvention up to a maximum of 8 per cent. Banks have so far lent ₹21,500 crore through three SBA instalments since November.

“This borrowing has been forced on us only because of the Centre not disbursing the subsidy on time. Worse, instead of receiving interest on delayed payments, we have to pay the balance 2.4 per cent interest on the SBA loans”, an industry source pointed out.

The NBS (nutrient-based subsidy) system provides for a fixed ₹/kg subsidy on each nutrient: N, P, K and S. While companies are free to set the MRPs of individual fertilisers, they also get a subsidy on these linked to their specific N, P, K and S content. The NBS, however, excludes urea, whose MRP is still fixed. While the MRPs of most fertilisers post-NBS have gone up 150-250 per cent, that of urea has risen only 11 per cent (see Table).

This has hurt companies by, first, boosting urea consumption artificially and, in turn, leading to higher subsidy receivables. Second, vastly cheaper urea has also made it difficult to increase the MRPs of other fertilisers.

These effects may be magnified in a drought year. According to US Awasthi, Managing Director of IFFCO, fertiliser consumption could fall by 10-15 per cent if the monsoon turns out to be bad. The decline would be largely in costlier non-urea fertilisers.

“This would be disastrous, as indiscriminate urea use is already affecting soil health and polluting our underground water. Urea should be brought under NBS and its MRP freed just as with other fertilisers. Also, we must move towards paying fertiliser subsidy directly to farmers and not route it through companies,” said Awasthi. While urea decontrol is unlikely now, the industry is, however, looking for a significant price hike to reduce differentials vis-à-vis other fertilisers.

“An MRP hike of ₹5,000/tonne for urea, maybe in two instalments, is quite feasible. On an annual consumption of 30 mt, it will straightaway save ₹15,000 crore of subsidy”, the industry source noted.

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