Urea price hike may be deferred

Shishir Sinha Vishwanath Kulkarni New Delhi | Updated on February 26, 2019

Attempts to increase urea prices in the recent past have not been successful due to lack of political consensus.

Decision to increase price likely to be left to new Govt next year

The UPA Government is unlikely to take a call on the contentious issue of increasing urea prices before the general elections. The term of the present Government ends in May 2014.

“Keeping political considerations in mind, any decision on urea price hike could be left for the new Government,” a highly placed Government source told Business Line. This comes at a time when the Finance Ministry is working hard to keep the fiscal deficit under the Budget target of 4.8 per cent of the gross domestic product.

Deferring the urea price revision will, therefore, not just inflate the subsidy bill but also pose a problem for fertiliser companies.

The price of urea, the most widely used fertiliser, is highly subsidised and fixed by the Government. The last major revision was on April 1, 2010, when the price was increased to Rs 5,310 per tonne from Rs 4,830 per tonne. In October last year, the price was marginally hiked by Rs 50 to Rs 5,360 a tonne. Attempts to increase urea prices in the recent past have not been successful due to lack of political consensus.

A Group of Ministers (GoM) was formed to look into the matter, but it is yet to meet after its inconclusive meeting in June. The group was supposed to consider revision in retail price due to the increase in pool prices of fuel feedstock.

The pricing policy review will take into account the prevailing energy scenario, production and supply scenario and international trend of urea prices, among others.

The modified price scheme will also contain subsidy at the present level, as it is proposed to increase the retail price annually to compensate for any increase in gas price and fixed costs of urea unit.

The fertiliser industry, which has been demanding an increase in urea prices for quite some time now, feels that any delay in price revision would impact its finances.

“Subsidy payment from the Government comes with a lag. Companies borrow to meet the working expenditure. So, when cost increases, there will be more borrowing resulting in higher interest burden,” a senior fertiliser company official said.

The average production cost of urea is currently around Rs 15,000 per tonne and has increased due to the weak rupee. The Government has budgeted Rs 65,971 crore for fertiliser subsidy this year, which is expected to rise to Rs 1.05 lakh crore.

In all, 29 urea units produce around 22.5 million tonnes of urea. The shortfall of 7.84 million tonnes is met through imports. Out of total imports, 20 lakh tonnes are imported from Oman India Fertiliser Company (OMIFCO) at a pre-fixed price, while the rest is imported at spot prices.

The pricing mechanism

The current pricing mechanism for urea is known as the New Pricing Scheme (NPS)-III policy, which was extended on a provisional basis on March 17, 2010, till further orders.

Under this, the difference between the cost of production of urea or the retention price (as assessed by the Fertiliser Industry Coordination Committee) and the statutorily fixed sale price is paid as subsidy under the Retention Price-cum Subsidy Scheme (RPS). Such a scheme ensures uniform sale price to farmers besides a reasonable return (12 per cent) on capital investment to the manufacturers.


Published on October 20, 2013

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