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The Centre’s fertiliser subsidy is unlikely to reduce even after new plants are set up under the urea investment policy because the production cost is expected to shoot up due to high global price of gas, according to credit rating agency Crisil.
The government has received 15 investment proposals for setting up of gas—based urea fertiliser plants in response to the New Investment Policy 2012, under which companies are incentivised to set up new plants and expand existing capacity.
Difference between maximum retail price and the cost of production is given as subsidy to them.
Crisil said: “For the subsidy to reduce, new urea plants need to procure gas at less than $12 per million metric British thermal unit (mmBtu), which appears unlikely.”
Against the backdrop of a sizeable demand—supply gap in natural gas projected over medium term in India, new urea projects will be dependent on imported re—gassified liquefied natural gas (RLNG) as feedstock, it said in a statement.
“At gas costs above $12 per mmBtu, the reimbursement for brown—field projects under the policy will exceed the average import parity price of urea for the last six years, resulting in higher subsidy bill,” Crisil Senior Director Pawan Agarwal said.
This scenario is highly likely as RLNG prices per mmBtu currently range between $18 and $20.
Stating that the government’s subsidy bill will increase as domestic production will be reimbursed at high gas cost, Crisil Senior Director Sudip Sural said, “For all gas prices, reimbursement at the floor price will be inadequate to fully cover operating and financial costs in the initial years, thereby constraining debt servicing ability.”
Crisil believes that players will need strong balance sheets, a proven track record at managing attendant project risks, and free cash flows from existing operations to support debt repayment on expansion projects in the initial years in order to maintain their respective credit risk profiles.
It suggested that the new urea projects will, therefore, require debt— servicing support from existing cash flows in initial years.
However, the Crisil said that the new policy holds potential to invite fresh investments after a gap of more than a decade and could facilitate reduction in India’s import dependence.
The country produces 22 million tonne of urea, against the requirement of 32 million tonne. The rest is imported.
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