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The urea investment policy quagmireqrcode

Jan. 14, 2013

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Jan. 14, 2013
The urea investment policy (UIP) recently approved by the Cabinet — based on EGoM recommendations — assures investors in a 'Greenfield' project prices linked to the import-parity price, or IMPP, with a range of $305-335 per tonne corresponding to gas price $6.50 per mmBtu. So, for each $1 increase in gas price beyond $6.50 per mmBtu, compensation to the manufacturer increases by $20 per tonne. Thus, for a gas price of $14 per mmBtu, the manufacturer would get $485 per tonne on the higher end of the range. 
Based on such tempting numbers, firms have reportedly drawn up plans for setting up urea capacity totalling around 20 million tonnes — 12 million tonnes more than the current deficit of eight million tonnes. If all proposed projects materialise, India will be staring at a huge urea surplus 4-5 years from now. This sounds bizarre. Neither policy initiatives nor the response of firms are in tune with ground realities. The government controls MRP of urea, which is currently Rs 5,310 per tonne. Under new price scheme (NPS), it compensates producers for excess of cost over this as subsidy. That will apply to urea from new units as well. 
At $14 per mmBtu, the gas cost alone will be Rs 18,480 per tonne (24 mmBtu for a tonne of urea, and $1 = Rs 55). Assurance of $485 per tonne will translate to a farmgate cost of close to Rs 30,000 per tonne. So, the government will pay a subsidy of around Rs 25,000 per tonne — nearly five times the price paid by farmers. Even imported urea from Oman India Fertiliser Co (OIFC) — a JV between Iffco/Kribhco and Oman Oil Co (OOC) — at a landed cost of $215 per tonne, perhaps the cheapest source of supply, means a subsidy of Rs 10,000 per tonne! 
Clearly, viability of these investments is predicated on subsidy support. But the government wants to rein in subsidy. Remember the FM's commitment in Budget 2012 to maintain subsidies (food, oil and fertilisers) within 2.5 per cent in the current year and bring them down to 1.75 per cent in three years? 
So, it axes fertiliser subsidy payments by reducing entitlement, underprovision, delayed payments, etc. This year, the Budget allocation of Rs 50,000 crore is already exhausted. Industry has not received payments for many months! Subsidy payments to new plants under UIP could reach a huge Rs 50,000 crore. Inability to pay, albeit due to fiscal compulsions, would force a retreat or reneging on commitments. 
In past, we have even seen 'retrospective' changes in policy parameters (seventh and eighth pricing periods 1997-98 to 1999-2000 and 2000-01 to 2002-03 under RPS). Industry has faced an uncertainty policy environment for more than 15 years when there was virtually no addition to capacity. This has led to heavy dependence on imports.

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