Enough of this urea populism

A Group of Ministers (GoM) was set up last year to suggest a suitable hike in urea price to neutralise increase in energy cost, so that subsidy can be reined in. The Government, however, has categorically ruled out any increase until general elections.

The maximum selling price (or MRP) of urea has been under control since 1957. Until the late 70s — a period of low inflation and low feedstock price — the MRP was higher than the cost of production and distribution. Hence, there was no subsidy.

Since 1977, equation was reversed, with cost exceeding selling price. The Government had to give subsidy to manufacturers. From ₹266 crore in 1977-78, subsidy rose to ₹5,796 crore in 1992-93 and further to ₹35,398 crore in 2012-13.

An increase in urea MRP holds the key to curtailing a ballooning fertiliser subsidy bill and reducing the imbalance in nutrient use ratio. The government recognises this, yet is unwilling to act. The fact remains that all political parties consider urea MRP as a ‘holy cow’.

In pampering mode With effect from June 1, 1974, MRP was increased from ₹1,050 per tonne to ₹2,000 per tonne — almost 100 per cent. This was propelled by an ‘oil crisis’ in the early 70s, which led to a steep increase in the international price of urea and feedstock, that is, naphtha used in its production.

This was followed by series of reductions viz., ₹1,850 from July 18, 1975; ₹1,750 from March 16, 1976; ₹1,650 per tonne from February 8, 1977; ₹1,550 per tonne from October 12, 1977 and ₹1,450 per tonne from March 10, 1979.

The initial reduction in July 1975 led to a spurt in ‘nitrogen’ consumption by 21.6 per cent. Thanks to favourable weather conditions in later years, consumption would have continued to grow even without further lowering of prices.

The price reductions were essentially political moves as various parties tried to outsmart each other in wooing farmers. After Congress having done its bit in March 1976 and February 1977, the Janata Party followed up with another reduction in October 1977.

The second bout of the ‘oil crisis’ came in 1979-80. Faced with balance of payments (BOP) problems, the Government approached the IMF for help and was forced to increase the price of urea to ₹2,000 per tonne from June 8, 1980 and further to ₹2,350 per tonne from July 11, 1981.

Despite these hikes, ‘N’ consumption increased from 3.498 million tonnes in 1979-80 to 3.678 million tonnes in 1980-81 and further to 4.068 million tonnes in 1981-82. Clearly, the higher MRP was absorbed by farmers. Yet, Government relapsed into a pampering mode.

In June 1983, it adopted an ingenious method of wooing farmers by asking industry to give a discount of 7.5 per cent. When industry refused, the price was reduced to ₹2,150 per tonne from June 29, 1983. From January 31, 1986 however, this was restored to ₹2,350 per tonne.

At the start of the 1990s, India faced an unprecedented BoP crisis. Again, Government had to approach the IMF. The latter insisted on stiff conditions. One of these was to eliminate fertiliser subsidy in three years.

With effect from July 25, 1991, Government increased the MRP of all fertilisers, including urea, by 40 per cent. However, within 2 weeks, it backtracked and from August 14, 1991, price hike was truncated to 30 per cent. Small and marginal farmers were fully exempt.

Continuing along the same course, from August 25, 1992, it decontrolled all P (phosphorus-based) and K (potassium-based) fertilisers and abolished subsidy. However, considering the political sensitivities associated with urea, it reduced its MRP by 10 per cent from ₹3,060 per tonne to ₹2,760 per tonne.

After two small steps forward (June 10, 1994 and Feb 20, 1997) taking price to ₹3,660, the new NDA Government under Vajpayee increased the price by ₹1,000 per tonne from June 1, 1998. The objective was to rein in subsidy and improve the NPK use ratio.

This led to such a political storm that Government was forced to roll back 50 per cent of the hike on the very next day. The balance was reversed in less than a fortnight. The ruling dispensation, fearing a backlash, made another attempt by increasing the price to ₹4,000 per tonne i.e. 9.6 per cent with effect from January 29, 1999. The timing of the move was such as to avoid Parliament pandemonium.

From February 29, 2000, the price was increased to ₹4,600 per tonne and further to ₹4,830 per tonne from February 28, 2002. It remained stuck at this level for 8 years. From April 1, 2010, price was raised to ₹5,310 per tonne, a mere 10 per cent. The current MRP is ₹5,360 per tonne is the result of a negligible ₹50 per tonne — less than 1 per cent — increase in October, 2012!

Reverse the trend Between 1981 and 2012, urea price increased from ₹2,350 to ₹5360 per tonne, or 2.2 times. In contrast, price of gas (main feedstock in urea production) went up from ₹0.32 per cubic metre to ₹8.4 per cubic metre, or 26 times.

The price of naphtha went up from around ₹600 per tonne to ₹50,000 per tonne, or 83 times. This led to a ‘widening’ gulf between cost of production and realisation from sales, and a skyrocketing subsidy. Given the political resistance to even a slight increase in urea price, only the heavens can help us.

(The author is a policy analyst)

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