Last year, Tata Chemicals Limited [TCL] sold its urea business viz. plant in Babrala, Uttar Pradesh with 700,000 tons ammonia and 1.2 million ton urea capacity to Yara Fertilizers India Private Limited [YFIL] – Indian arm of Norway’s Yara lnternational ASA – for a sum of Rs 2670 crores. This was a distress sale fetching the company only 2/3rd of the money so far invested. Then, it had also alluded to selling its complex fertilizer business [including plant at Haldia].
Keeping their promise, the Tatas are in advanced negotiations with Indian-born Indonesian billionaire Sri Prakash Lohia of Indorama Corporation to sell the Haldia unit – on a slump sale basis for Rs 600-800 crore. The sale will include the plant and other fixed assets and transfer of subsidy receivables [around Rs 500-700 crore] from the government.
The decisions are a culmination of the conglomerate’s well thought out plans to initially cap investment in fertilizer leading to eventual exit. It had also restructured operations of two overseas plants [Kenya and USA], shutting down one and suspending operations at the other. Kumarangam Birla too is contemplating sale of ammonia/urea plant under Indo-Gulf Fertilizers Ltd in Jagdishpur.
Over three decades ago, when the mentioned plants were contemplated, Tata and Birla were very upbeat about the prospects of fertilizer industry in India. But, ever since commissioning, they have been facing ‘birth pangs’ – for no fault of theirs; instead, it is a stifling policy environment that afflicts the entire industry.
At the root of it is control on almost every aspect viz., setting up of plant, choice of feedstock and its supply & pricing, production/supply, movement and distribution, pricing of fertilizers [both at factory gate and farmer’s level] etc. The controls were imposed decades back purportedly to make India self-sufficient in fertilizers so that ‘timely’ and ‘adequate’ supplies are assured to farmers.
These were driven by the so called “socialistic” philosophy and may have helped in initial years [decade of 80s] but over the long-term have failed to serve the objective. Today, India is far from achieving self-sufficiency in fertilizers and spends billions of dollars on their import in finished form and raw materials/intermediates for their domestic manufacture.
Yet, successive governments have merrily continued with controls under a delusion that if these are removed, that would affect self-sufficiency in fertilizers which in turn, would jeopardize our food security. Luckily, the country is secure in food even without being self-sufficient in fertilizers; yet delusion continues and with it controls that have become more and more obtrusive over the years.
First, on setting up of project, though de jure, any one is free to invest and there are no restriction on foreign investment [100% FDI is allowed], de facto, all plans of the investor have to be approved as output from the project has to fit in to overall supply-demand plan decided by the government who determines how much will be sourced domestically and how much will be imported.
Second, as regards supply of gas [feed stock for making urea], the manufacturer has to take whatever quantity is allocated by an inter-ministerial committee under secretary, ministry of petroleum and natural gas [MPNG] and at a price as per specified formula. Even for imported gas, he has to depend mostly on the Gas Authority of India [GAIL] – a public sector undertaking [PSU] – which is the sole designated agency for marketing of gas.
Third, how much a manufacturer can produce is limited by how much it will be accommodated under the supply plan – christened as ECA [Essential Commodities Act] allocation – which is formulated by centre and states via so called zonal conferences [held prior to each of 2 seasons viz., Kharif [April-September] and Rabi [October-March] where manufacturers play subordinate role.
Fourth, how much a producer can sell is largely under control as 50% of his urea production has to be ‘mandatorily’ sold as per movement and distribution plan finalized by center and states. Even for the balance, even though technically, he is free to sell, the government has the right to appropriate the quantity for sale under ECA depending on the evolving situation during a season.
Fifth, the government controls maximum retail price [MRP] of urea at low level un-related to production cost. It also fixes ex-factory price [or retention price] which is expected to cover his cost plus give prescribed return on his equity capital. How much he can earn? This too is not in his control as any increase in efficiency or cost cutting runs the risk of being mopped up.
Sixth, MRP being 25-50% of the ex-factory price, 50-75% of cost of supply comes as subsidy. Due to budgetary constraints and inadequate allocation [courtesy, relentless fiscal consolidation drive], the government invariably delays payments. The manufacturers are thus forced to borrow to finance subsidy receivables, the interest cost of which is not reimbursed to them.
On the other hand, the manufacturers of complex fertilizers are technically free to sell but under ECA, the government can lay claim on 20% of their production. As regards MRP, though de jure it is not under control, de facto it notifies the price and expects manufacturers to comply. This prevents them from realizing the expected return on investment. Like urea, producers of complexes too suffer from delays in payment of subsidy dues.
A person who intends to venture into a business looks for a ‘reasonable’ and ‘stable’ return. If, it turns out that every factor impinging on it is controlled by the bureaucrat [ministers normally leave details to be handled by him/her] then, he won’t invest. And, someone already invested will exit. This in a nut-shell explains the exit of Tata from fertilizers and intent of Birla to follow suit.
There is no indication that things will change. The direct benefit transfer [DBT] of fertilizer subsidy – as alluded to in finance ministers’ budget speech [2016-17] – strictly speaking should come with removal of all controls. But, that is not what the government has in mind. It will continue to order manufacturers to sell fertilizers at low price and compensate them for higher cost over this as subsidy.
Therefore, even post-DBT [government’s version], obtrusive controls and stifling policy environment will remain intact. One can see more exit/slump sale of fertilizer plants in times ahead.