During April–November, 2014, urea imports were 900,000 tons (16 percent) less when compared to corresponding period in 2013. The shortfall was aggravated by drop in supplies from OMIFCO (Oman-India Fertilizer Company) – a joint venture between IFFCO, KRIBHCO and Oman Oil Company (OOC) – with whom India has a long-term off-take agreement.
This together with shortfall in domestic production (3 naphtha-based plants viz., Madras Fertilizers; Mangalore Chemicals & Fertilizers and Southern Petrochemicals Industries had stopped producing due to government’s decision to suspend subsidy payments) led to aggravation of imbalance in the demand–supply in the run up to Rabi season (October, 14 to March, 15).
The result was proliferation of black-marketing especially in northern and eastern parts with urea selling at over 30% higher than ‘controlled’ maximum retail price (MRP) of Rs 5360 per ton. To curb it, central government pumped a huge 3.7 million tons in December, 2014 (as against normal monthly release of about 2.5–3 million tons) by stepping up imports.
As a result, while market may have been cooled for now, this is at best a short-term palliative. The root cause behind frequent flare of shortages is perennial deficit in domestic availability of urea vis-a-vis requirements. Against consumption of about 30 million tons per annum, indigenous production is only 21 million tons. This leads to heavy dependence on import which can lead to crisis if required quantities are not imported in time.
The perennial deficit can be traced to our inability to increase domestic production even as demand continues to grow. During the last 15 years or so, not even a single urea plant – new grass-root or brown-field – has been set up. And, the sole factor responsible for this is absence of a long-term and stable policy environment. This in turn, is missing because no government in the past ever took a clear view on dispensing with subsidy on fertilizers.
Linked with this is the bigger question of control on urea MRP which is a 6 decade old legacy. Since 1991, even as price controls were dismantled across sectors including non-urea fertilizers viz., DAP, SSP, MOP etc, control on urea has been left un-touched. In April 2010, when former were brought under nutrient-based scheme (NBS), the cabinet note mooted for this purpose intended to cover latter as well. However, on insistence of then fertilizer minister Alagiri (who opined this was inadvertent as he neither understood English nor Hindi), proposal to cover urea was dropped!
It would be naive to attribute continued control on urea price to Alagiri factor alone. The reality is all parties across political spectrum want to keep control and have done their bit in perpetuating it. Moreover, they have lobbied for keeping price ‘artificially’ low totally out of tune with general inflation and even with price of food for sale through public distribution system (PDS).
The persistence with low MRP when cost of production is more than twice for efficient gas based plants, three times for other high cost gas based units, eight times for naphtha-based plants and five times cost of imported urea (in 2008, this went up to 9-10 times) has ominous implications for subsidy. Pertinently, new pricing scheme (NPS) protects even high cost units by giving subsidy specific to each. Imported urea any way enjoys unfettered subsidy without limits!
This scheme scuttles initiatives to improve efficiency, cut cost, efforts to procure feedstock and other inputs at low cost and optimize operations. While, high cost units sit complacent under protective shield of NPS [these include a number of units under public sector undertakings (PSUs)], low cost units have no incentive to perform better as the same is not rewarded.
A highly controlled regime of determining retention prices for each unit and hence subsidy entitlement wherein the bureaucrat has a big role in deciding who gets how much is the biggest enemy of a conducive policy environment. No wonder, a company like Tata Chemicals whose core business hitherto has been fertilizers, is now seriously considering moving in to food additives viz., spices, pulses etc where it does not face strangulation!
Low MRP leads to other maladies as well. When, urea is available in India at just about US$ 85 per ton (corresponding to Rs 5360 per ton) as against 3–4 times higher price prevailing in neighbouring Bangladesh, Pakistan, etc, large-scale smuggling to those countries is inevitable. Including diversion for industrial use, total urea thus siphoned-off could be a high of 30%.
Further, when DAP and other complexes sell at over 4 times urea price and MOP at more than 3 times urea (thanks to fixed subsidy on those fertilizers leading to much higher MRP), excessive use of urea is inevitable. The resultant imbalance in fertilizer consumption affects use efficiency, crop yield, soil health and the environment.
Apart from political class who identifies low urea price with vote bank, others viz., importers lobby, dubious traders, corrupt officials etc also have vested interest in continuing the status quo. That would explain as to why even a clarion call from Fertilizer Association of India (FAI) (a body that represents fertilizer manufacturers) that government decontrol urea and stop giving subsidy through industry, has fallen on deaf ears.
A perception that freeing up urea price will hurt farmers has been nailed in a recent study by Commission on Agriculture Cost and Prices (CACP) which says that fertilizers account for only 5% of cost of farm produce. Based on this, CACP argues that a 10% increase in fertilizer price will have only 0.5% impact on production cost. So, even if urea price doubles, cost will increase by 5%.
True, even this could be painful for small and marginal farmers who are about 85% out of a total of 135 million farm households. However, they can be protected through direct cash support credited to their bank account linked to Aadhaar. 100 million accounts already opened under PM Jan Dhan Yojna (PMJDY) and more in pipeline should come handy for extending such support.
Removal of price control on urea will attract investment in adding to capacity, restore demand-supply balance, lower imports, rein in subsidy outgo, reduce imbalance in fertilizer use, improve use efficiency, restore soil health and curb black-marketing/smuggling. It will be a win-win for all stakeholders.
Taking a cue from diesel where post-deregulation, price is moving south-ward and no burden of subsidy on exchequer, Modi should crack the whip by implementing long-awaited reforms in urea. Hope, he does it in ensuing budget for 2015-16.