Fledgling fertiliser reforms

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Successive Governments have lamented an increase in fertiliser subsidy and its destabilising effect on the fiscal situation. Yet, they have failed to address the real issue

The price of domestic gas has been increased from the existing $ 2.89  per million British thermal unit (mmBtu) on net calorific value basis to $3.06 per mmBtu for a six-month period beginning April 1. The hike, taking the price back to the level reached two years ago, has brought to the fore some niggling questions which successive ruling dispensations have dodged for several decades.

First, who pays for the extra price that user industries — mainly fertilisers (besides power, CNG and PNG) — shell out?  The urea industry alone requires over 45 million standard cubic meter (mmscmd) of gas as against the total domestic supply of 90 mmscmd. The maximum retail price (MRP) of urea is controlled at a low-level, unrelated to its cost of production, which is higher. The excess amount is reimbursed to manufacturers as subsidy. When the price of gas goes up, leading to an increase in production cost, this leads to a corresponding hike in subsidy as MRP remains unchanged.

Under this arrangement, subsidy on urea has increased leaps and bounds and currently stands at Rs 45,000 crore (budget allocation for 2018-19) in total fertiliser subsidy of Rs 70,000 crore (balance Rs 25,000 crore is on non-urea fertilisers viz, DAP, MOP, complexes etc). With every round of hike in gas price, the subsidy payout goes up.        

All Governments, irrespective of their political colour, have bemoaned an increase in fertiliser subsidy and its destabilising effect on the fiscal situation. Yet, they have refrained from addressing the generic cause behind increase in it viz, low MRP on the one hand and increase in production cost on the other. On several occasions in the past, even when MRP was hiked, it was rolled back.      

Second, despite the supply and pricing of gas having a strong bearing on the production cost and in turn, subsidy on urea, it has not received the kind of attention it deserves. The urea industry depends on import for 35 per cent of its gas requirement (as it gets only one-third of the total domestic supply), which under the current tight global demand-supply scenario, and comes as thrice the price of domestic gas. At plant site, imported gas would be about $12 per mmBtu as against domestic gas costing about five dollar per mmBtu. The weighted average cost would be $7.5 per mmBtu (12x0.35+5x0.65). At this rate, the gas cost alone would be Rs 11,700 per tonne urea — more than double its existing MRP of Rs 5,360 per tonne.

Even when more of domestic gas is available, that would be at a much higher price. This is because the additional gas will come from more difficult, deep/ultra deep and high temperature/high-pressure fields for which the Government has allowed higher price, based on

alternate fuels viz, naphtha, fuel oil, LNG among others. In any case, gas is unlikely to flow from any of such fields within the next three to four years or so. Inability to secure gas supplies at low price (despite the Modi Government's efforts to renegotiate gas contracts) juxtaposed with low MRP, leads to an ever-increasing gap between the cost and price, and in turn, balloons subsidy.

The way forward is intensified exploration and development efforts to get higher volumes of domestic gas to make production economical even at a lower price. Higher volume holds the key, as without it, the field would be uneconomical despite the higher price. Yet, the irony is that oil and gas companies are hankering for higher price only and the Government is yielding. This is not a sustainable option.

Third, despite much talked about urea use reduction to promote balanced fertiliser use, not much is happening on the ground. The clarion call by Prime Minister Modi to cut urea use by 50 per cent within next five years lacks seriousness. If that were the real intent, why would the Government concurrently take steps to increase domestic urea capacity?

India’s current urea production is about 24 million tonne, annually, as against a consumption of 32 million tonne. If urea use is to be reduced by 50 per cent or to 16 million tonne, there will be a surplus of eight million tonne. This is without taking cognizance of plugging leakages consequent the need of coating of urea which is now mandatory. With this adjustment, the surplus urea will further increase. It makes no sense to go ahead with the revival of plants under the Fertiliser Corporation of India (FCI) and Hindustan Fertiliser Corporation of India (HFCL) viz, Sindri, Gorakhpur, Talcher, Ramagundam and Barauni, which together are expected to add 7.5 million tonne annually. Given the high investment required for the resurrection of these plants and high gas cost leading to high production cost, selling the surplus urea in the international market won't be easy either.

Fourth, under the extant new pricing scheme, urea manufacturers get unit-specific price/subsidy which protects high cost/in-efficient units and gives no incentive to low cost/efficient units. In 2012, a group of ministers under the then Agriculture Minister Sharad Pawar, had approved a switch over to a uniform pricing scheme — similar to nutrient based scheme for non-urea fertilisers. But this is yet to be implemented. Sans uniform pricing, it is not possible to build a fertile ground for latching on to a market-driven system which is a sine qua non for competition, high efficiency, low cost and R&D — driving the industry towards sustainable growth. Without it, even the potential benefits of direct benefit transfer will not accrue. Post May 2019, the new Government will need to address these challenges head-on. It will have to work on a holistic policy to pave the way for (i) adequate supply of domestic gas at an ‘affordable' price; (ii) de-regulated/market driven fertilizer industry; (iii) DBT of fertiliser subsidy to poor farmers and (iv) balanced fertiliser use.

(The writer is a freelance journalist)

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