Fertilisers: Back to the licence raj

Elections can wreck even the best policy reform. A vivid demonstration of this is available in the Office Memorandum dated June 26, 2013 issued by the Department of Fertilisers (DoF).

It says that under the nutrient-based scheme (NBS) for de-controlled di-ammonium phosphate (DAP)/complex fertilisers, potash and Single Super Phosphate (SSP), the Government will fix ‘reasonable’ MRPs and manufacturers charging higher will be deemed to be ‘profiteering’ from the scheme.

The Memorandum specifies action in cases of violation. This would take the form of denial of subsidy equal to the extent of the‘un-reasonable’ amount for the product/grade concerned or its ‘exclusion’ from the purview of NBS.

Companies have been directed to submit detailed annual cost data from 2010-11 onwards, duly certified by auditors. From 2012-13, they are required to give data on a monthly basis (something never heard of).

Rupee drop not factored in

The Department of Fertilisers has has notified ‘reasonable’ MRPs for kharif 2013, namely Rs 22,500 per tonne DAP , Rs 16,000 per tonne MOP (muriate of potash) and similar ‘reasonable’ MRPs for 20 other fertilisers covered under the nutrient based scheme.

For arriving at these numbers, the Department determined ‘reference’ MRPs in respect of sales during rabi 2012-13, namely Rs 24,000 per tonne DAP & Rs 17,000 per tonne MOP and applied reductions due to drop in international prices to fix ‘reasonable’ MRP for kharif 2013.

Significantly, the impact of rupee depreciation from Rs 54.4 to Rs 59 to a dollar since March 2013 till date on production cost (P&K industry is almost entirely dependent on imported raw materials) has not been captured.

The fall of every one rupee vis-a-vis the dollar increases the landed cost of DAP by Rs 500 per tonne. Therefore, depreciation by Rs 4.6 (59-54.4) will increase cost by Rs 2,300 per tonne. This will remain uncovered!

Billed as a landmark reform in the fertiliser sector (perhaps, the only one in the last two decades), the nutrient-based scheme (NBS) was introduced in April 2010. Under it, subsidy was linked to nutrient content, thus treating all producers and all fertiliser grades ‘uniformly’. Producers were free to fix MRPs.

Coming a full circle

One needs to dig a bit into history to know that as far back as the mid-70s, companies already had the ‘freedom’ to set prices. Under a scheme introduced in March 1976, all complex manufacturers got subsidy at the rate of Rs 1,250 per tonne phosphorous pentoxide (P2O5) (prior to this, there were no price and distribution controls).

They were free to determine reasonable MRP based on cost of production and distribution and required to further reduce price to the extent of subsidy received from the Government, for example, Rs 575 per tonne of DAP ( a tonne of DAP contains 46 per cent P2O5).

However, based on the recommendations of the Marathe Committee (part II of the Report), in February 1979, the Government introduced formal control on selling price and brought these fertilisers under the retention price scheme (RPS). Urea was already under RPS with control on MRP since November 1977.

After more than a decade or so, freedom came within striking distance when, from August 25, 1992, based on a JPC recommendation, the Government removed pricing and distribution controls on all P&K fertilisers and dismantled the retention price scheme. But this had a very short life of five weeks!

From October 1992, subsidy was resurrected under a new incarnation, namely ‘ad hoc concession’. And with it came controls on MRP (unlike March ’76 to February ’79 when there were none). Until 1996-97, States controlled prices and thereafter, controls were exercised by the Central government.

Through an Order dated August 28, 1998, the Government allowed manufacturers/importers freedom to fix MRPs. However, even before the ink was dry, this Order was withdrawn in less than a month vide another order September 23, 1998.

Government control on selling prices continued right up to March 31, 2010. From April 1, 2010, the industry was unshackled with introduction of the nutrient based scheme. Precisely, three years thereafter, with effect from April 2013 it has been shackled again. We have come full circle.

Taking a holistic look, it turns out that for P&K fertilisers, the Government has tolerance for pricing freedom between a few weeks on the lower side and three years on the higher side. For urea, it has ‘zero’ tolerance for freedom — not even for a day, as testified by continued control all through for several decades.

The Department of Fertilisers has clarified that the ‘Government does not want controls to be back’. But this intent is not reflected in action on the ground. The prescribed action in the case of deviations from ‘reasonable’ prices effectively means that controls are back.

Thus, even if a company charges Rs 100 per tonne more, it runs the risk of being denied subsidy on the fertiliser grade concerned, even on all its products. Short of putting an executive behind bars (applicable if control on MRP is ‘statutory’ as in urea), the Order has all the remnants of control raj .

Leave it to market

Apart from pricing freedom, another hallmark of the nutrient based scheme is ‘uniform’ subsidy across manufacturers. Under the tweaked dispensation, even this becomes a casualty. Based on cost data of each unit, if the Department of Fertilisers determines ‘disallowances’, effective subsidy will vary from unit to unit.

It is a virtual return to ‘licence Raj’ whereby the officials in the Department of Fertilisers would virtually micro-manage and control the operations of each and every producer of P&K fertilisers. The pressure of fiscal consolidation will prompt them to cut corners, resulting in huge disallowances that would kill industry.

With nutrient based scheme, the Government took a major step forward to reform the fertiliser sector. The need of the hour was to let urea also embrace this. In early 2012, GoM had even recommended its adoption. While that is on the backburner, the Government has made a retreat on what was already done.

The Order should be withdrawn immediately. As regards high MRP or alleged profiteering, that is best addressed through market forces and competition. Additionally, steps are needed to rein in rupee depreciation alongside innovative strategies to get raw materials at lower prices.

Ideally, the Government should give subsidy directly to farmers under DBT (direct benefit transfer) for both P&K fertilisers and urea. The earlier this is done, the better. For this to happen, the powers that be need to put economics in the ‘driver’s seat’.

(The author is a policy analyst)

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