Oct. 19, 2016
If the second half of the last century was about enhancing India’s fertiliser production capacity and the role of crop nutrients during the Green Revolution, as articulated in the previous articles of the series, the turn of century was marked by significant policy changes on pricing and manufacturing.
At the start of the 10th Five-Year Plan in 2002, the government approved a new pricing policy for urea units. The new pricing scheme (NPS) came into force with effect from April 2003. The scheme aimed to achieve greater transparency, uniformity and efficiency in disbursements of subsidy payments to urea units, and to induce manufacturers to take cost reduction measures, thereby becoming competitive. It introduced a group-based concession which replaced the retention price scheme (RPS). NPS advocated phased decontrol of movement, distribution and sale of urea which was till then under the purview of the Essential Commodities Act (ECA).
Until March 2003, subsidy to urea manufacturers was being regulated in terms of the provisions of RPS. Under RPS, the difference between retention price (cost of production as assessed by the government plus 12% post-tax return on net worth) and the maximum retail price was paid as subsidy to the urea units. Retention price used to be determined unit-wise, which differed from unit to unit depending upon the technology, feedstock used, the level of capacity utilisation, energy consumption and distance from the source of feedstock or raw material.
“Though RPS did achieve its objective of increasing investments in the fertiliser industry and thereby creating new capacities and enhanced fertiliser production along with increasing use of chemical fertilisers, the scheme had been criticised for being ‘cost-plus’ in nature and not providing strong incentives for encouraging efficiency,” says a report compiled by a working group on fertiliser industry for the 12th Plan ending 2017.
However, post the introduction of NPS, not many greenfield projects were commissioned. “After the introduction of NPS, while there have not been any fresh investments on greenfield projects barring one, several debottlenecking projects were commissioned by major industry participants,” says K. Ravichandran, senior vice-president and co-head, corporate ratings at Icra Ltd. As the realisation was linked to import parity prices for such projects, the returns on such projects were attractive from the industry perspective and around two million tonne (MT) of additional production were brought in by such projects, which helped reduce our import bill and subsidy outgo, Ravichandran adds. The NPS was implemented in stages. While stage I was for a year, from April 2003 to March 2004, stage II was from April 2004 to September 2006.
The new scheme fared well as it helped in linking the energy and productivity in a better way, says Neeru Abrol, former chairman and managing director of state-run National Fertilizers Ltd. The government came out with the policy for attracting fresh investment in urea sector in January 2004 based on the principle of long-run average cost. However, it also did not attract fresh investments as the return on investment based on the policy was not found attractive. Moreover, availability of gas on a long-term basis had always been a limiting factor.
“The new investment policy was notified in September 2008 under which the pricing of urea from new investments in the form of revamps, expansions, brownfield and greenfield projects was based on import parity price (IPP) with a provision of a floor and a ceiling. This policy encouraged investment in revamping of existing units creating a capacity of producing about 2 MT of additional urea. However, this new policy also could not attract investment in brownfield (expansion) and greenfield (new) projects,” the report by working group quoted above adds.
The main constraints in attracting investment in new urea projects was non?availability of gas, uncertainty regarding the price of gas, pipeline connectivity for transporting gas and uncertainty regarding returns on investment under prescribed price linked to IPP with a floor and a ceiling of $250 per tonne and $425 per tonne, respectively, the report said.
The new policy also encouraged setting up of joint venture (JV) fertiliser plants abroad in countries where gas was available in abundance and at reasonable prices. It was during this period when large JVs including Indo Jordan Chemicals Co. was set up in May 1997, Indo Moroc Phosphore SA in October 1999 and Oman India Fertilizer Co. (OMIFCO) in July 2005. Further ahead, Tunisian Indian Fertilizers SA was established in Tunisia in June 2013 and Jordan India Fertilizer Co. (JIFCO) was commissioned in May 2014.
The domestic capacity and production of fertilisers had stagnated. However, with rising demand, imports were continuously rising. India imported 3.6 MT of fertiliser materials during 2000?01 which increased to 16.8 MT during 2009?10. During 2010?11, India imported almost one-third, around 21 MT, of fertilisers out of the total consumption of 58 MT.
As the country’s import dependence increased, the international prices also rose making India vulnerable to the vagaries of price fluctuations. For example, import of urea during 2000?01 was around 220,000 tonnes and the average cost and freight of urea was $117 per tonne. It increased to around $327 per tonne during 2010?11 when India imported about 6.6 MT of urea. Same was the case with diammonium phosphate wherein the average cost and freight to India increased from $179 per tonne during 2000? 01 with an import of 861,000 tonnes to $496 per tonne during 2010?11 when India imported 7.4 MT.
NBS policy for P&K fertilisers
In the context of country’s food security, the declining response of agricultural productivity to increased fertilisers usage in the country had been a matter of concern. It was due to this concern that the government in 2010 intended to move towards a nutrient-based subsidy (NBS) instead of existing product pricing regime.
The introduction of NBS scheme for potassium (P) and phosphatic (K) fertilisers brought a significant shift in the policy, under which the subsidy was fixed for each nutrient—nitrogen (N), P, K and sulphur (S)—which was determined by the government every year. Since the subsidy now got fixed, the selling price of fertilisers at farm gate level got decontrolled and started getting determined by market forces. However, the inter-ministerial committee keeps strict vigil on the reasonability of retail prices of fertilisers.
The NBS in P and K was expected to encourage the fertiliser industry to focus more on farmers through activities such as development of new innovative fertiliser products customised to their requirements, farm extension services, brand building and product differentiation. Further, the basket of subsidised fertilisers also gradually broadened, covering new fertilisers containing secondary and micro?nutrients.
This helped achieving the twin objectives of balanced fertilisation through better products and growth of indigenous industry based on buoyant demand of fertilisers in the country. Further, the outgo of subsidy in P and K started being forecasted and budgeted more rationally on annual basis.
New investments policy of 2012
The 2008 policy attracted investments only for revamp of some existing ammonia-based urea plants. However, with no investment coming for brownfield or greenfield projects, the department of fertilisers notified a new investment policy to facilitate fresh investments in urea production. The policy provided a structure of a floor price and a ceiling price for the amount payable to urea units, to be calculated based on delivered gas price to respective urea units.
In a fresh initiative, the government notified a modified new pricing scheme III for existing urea units on 2 April 2014. It provided for maximum additional fixed cost towards increase in the four components of conversion cost—salaries and wages, contract labour, selling expense, and repair and maintenance of Rs.350 per tonne to existing urea units.
Urea push and diversions
Fertiliser diversion has been a bane for the sector as realised by many a government over the years. Various measures have been tried to prevent leakage of subsidy on this account.
The National Democratic Alliance (NDA) government in January 2015 decided that all urea makers will have to produce neem-coated urea to prevent illegal diversion. As neem-coated urea is unfit for industrial use, the chances of the most commonly used fertiliser’s diversion minimises.
The government issued a notification on 7 January 2015 after which the domestic urea producers were allowed to produce neem-coated urea up to their total production of subsidised urea. It was also decided to restrict the extra 5% of retail price to be charged by the companies of neem-coated urea for future to the extent of 5% of the existing retail price of urea only. On 24 March 2015, the department of fertilisers made it mandatory for all companies to produce 75% of their total production of subsidised urea as neem coated. Thereafter on 25 May 2015, 100% of total production of urea was made mandatory to be neem coated.
In a significant development, the Cabinet Committee on Economic Affairs approved a policy on 31 March 2015 to supply gas at uniform delivered price to all fertiliser plants on the gas grid for production of urea through a pooling mechanism.
Further, the new urea policy 2015 for existing gas-based urea manufacturing units was notified on 25 May 2015. Under the policy, 25 gas-based units were eligible to get concession rates on the basis of energy norms fixed for each group from 1 June 2015 to 31 March 2018.
From realising the need to enhancing capacity and now ensuring adequate supply, fertilisers have remained the focus of successive governments. The NDA government now plans to tweak the model adopted for direct benefit transfer for transfer of fertiliser subsidies, wherein manufacturers will be repaid only for the fertiliser bought by the intended beneficiaries who will be identified through their Aadhaar or voter identification card details.
The success of the sector will now depend upon the efficacy of the scheme in the backdrop of India’s fertiliser demand for the kharif season (July and October) remaining subdued despite the country receiving near-normal monsoon rains till now, after two successive years of drought.