Conditions not fertile yet for nutrient-based subsidy on urea

In a country like ours, where around 65 per cent of the population depends on agriculture for their livelihood, the Government has a major role in ensuring the availability of agri-inputs including fertilisers at affordable prices. At the same time, balanced fertilisation is necessary to enhance farm productivity.

The total consumption of urea is around 27 million tonne (MT). While 21 MT is met through domestic production, the balance is met through imports. Among the domestic producers, gas-based units account for 17 MT and the rest is produced by naphtha/furnace oil/LSHS-based units.

With effect from April 1, 2010, the industry is governed by New Pricing Scheme (NPS) for urea and nutrient-based subsidy (NBS) for phosphatic, potassic and other complex fertilisers.

Present NPS for urea

As per NPS scheme, the concession payable to each and every urea manufacturer is different. The farm gate price of urea is fixed by the Government and the difference between the farm gate price and the unit's cost of production/tonne is reimbursed as subsidy by the Government.

As per the proposed NBS, the concession payable/tonne of urea to the farmer is fixed by the Government on a percentage basis of import parity price while the farm gate price of urea is left open. The manufacturer can revise the selling price depending on market conditions.

In the NBS scheme, the subsidy is fixed and the farm gate price is variable, determined by market forces, whereas in the NPS, the farm gate price is fixed and the subsidy is variable.

Heterogeneous feedstocks

The urea industry being heterogeneous with different feedstock and vintage, energy consumption for a tonne of urea is widely different.

Even within the gas-based urea units, the present concession rates widely vary depending on the source and price of gas, i.e. APM gas, non-APM gas, LNG, and the prices range from $4.2/MMBTU to $9/MMBTU. Hence, uniform price across industry under NBS regime may not be practicable at this juncture.

The average cost of production of all gas-based units is approximately $192 a tonne against the current international price (import parity price) of urea at $400/tonne.

If the concession for urea is linked to IPP under NBS regime, there will be a windfall profit of more than $200/tonne for gas-based units at the cost of farmers.

Similarly, as for the production from liquid feedstock such as naphtha and furnace oil, , the difference between the subsidy and farm gate price cannot be borne by the farmer since it will be huge .

Therefore some other formula has to be found to sustain the operations of these units till gas connectivity is provided by the Government.

Introduction of NBS for urea at this stage may jeopardise the non-gas based units, which may result in large scale imports pushing up further the price of urea in the international market.

The government has already given certain commitments to the non-gas based units to enable them to convert to gas.

A road map has been made for conversion of the non-gas based units to gas-based units within the next two-three years. As an interim measure, the Department of Fertilisers (DoF) has already proposed a modified NPS scheme.

It is understood that Group of Ministers (GoM) decided to form a Committee of Secretaries (CoS) to study the pros and cons of NBS. In the interim, modified NPS as suggested by the Department of Fertilisers is the best solution to safeguard the domestic production capacity. There is a perception that implementation of NBS will benefit all the stakeholders namely farmers, the industry and the Government while in reality it is not so.

With the Government announcing the reduced subsidy applicable per nutrient with effect from April 1, 2011, prices of phosphatic and potassic fertilisers will further rise.

Even in the NBS regime, the farm gate price of urea depends on the concession to be given by Government and may as a result rise, in the process failing to achieve balanced fertiliser application. A classic example is the rising price of DAP. Ever since the implementation of NBS , DAP price has risen by Rs 1,800/tonne or nearly Rs 100 a bag.

May impact prices

If global prices of fertilisers rise, introduction of NBS would lead to an increase in farm gate price of all fertilisers. This may not bring in dramatic improvement in balanced use of fertilisers.

The NBS is also expected to bring new investments in the urea sector. Uncertainty over the availability of gas on a long-term basis for the existing and new investments is another major impediment for new entrants.

Gas allocation policy

The Government has to formulate a firm policy on allocation of gas for the existing as well as greenfield projects to attract new investments into the sector rather than hurriedly introduce NBS scheme.

Under the present policy regime, industry representatives have informed the Finance Minister on November 3, 2010 that the industry is ready with the investment proposal for 7-8 million tonnes of urea, if the gas allocation is given.

In the absence of pipeline connectivity for gas to naphtha-based units in South India, implementation of NBS will lead to the closure of naphtha-based units resulting in production loss of around 20 lakh tonnes.

NBS for the urea sector has to be implemented with lot of caution. It could be deferred at least until all the non-gas based units are converted to gas and industry becomes homogenous with respect to feedstock.

Implementation of modified NPS in the intervening period will help the country protect the existing domestic capacities and also ensure national food security.

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