The Cabinet Committee on Economic Affairs (CCEA) has recently approved subsidy for urea to be produced by Talcher Fertilizers (TFL) – a joint venture of 4 public sector undertakings (PSUs) viz. Coal India Limited (CIL), GAIL (India), Rashtriya Chemicals and Fertilizers (RCF) and Fertilizer Corporation of India (FCI). The TFL is setting up the urea plant with installed capacity of 1.27 million ton per annum at Talcher (Odisha) at an estimated investment of Rs 13,277 crore and is expected to be commissioned by September 2023. The project is based on use of coal gasification technology.
According to the union commerce minister, Piyush Goal, the CCEA has given its approval for “a specific subsidy to promote this innovative technology for the first time in India thereby helping the country become Aatmanirbhar (self-reliant)”. It involves conversion of coal to synthesis gas – a mixture of hydrogen and carbon monoxide – which in turn is processed to make urea,” It is a clean-coal technology giving negligible sulphur dioxide, nitrogen dioxide, and free particulate emissions as compared to directly coal fired processes.
The Government of India (GOI) controls the maximum retail price (MRP) of urea – set at a low level, without any relation to the cost of production and distribution. The manufacturers get reimbursed for the shortfall in realization from sales via the subsidy on a ‘unit-specific’ basis under the New Pricing Scheme (NPS) in vogue since 2003 – a new version of the Retention Price Scheme (RPS) launched way back in 1977. There are over 30 urea plants all based on gas – producing a total of 24 million ton annually. The subsidy given to each plant is equal to its retention price (RP) minus the MRP. The RP in turn, is calculated taking into account efficiency norms such as capacity utilization, energy consumption, capital related charges (CRC), other fixed cost, delivered cost of gas and other inputs etc.
Even as the current MRP is ridiculously low at Rs 5,360 per tonne or $71 per ton (at current exchange rate), the RP varies from a low of about US$ 200 per ton to a high of US$ 350 per ton. In the past, when plants were based on different feedstock such as naphtha, fuel oil/LSHS, and even within the same feedstock category, there were differences in delivered cost, such wide variation was understandable. Now, when all plants are on gas and gas price to all is uniform (under a policy introduced in 2015), this is inexplicable.
This has led to multiple maladies viz. protection of high cost and inefficient plants, lack of incentive for performers to sustain efficiency improvement and cost reduction, excessive use of urea, imbalance in fertilizer use (current NPK use ratio is 6.7:2.4:1 against an ideal 4:2:1), deterioration in soil health, misuse and diversion of urea (a high of at 30-40%) and unsustainable increase in subsidy (the total outgo on fertilizer subsidy during 2021-22 is pegged at Rs 79,530 crore including Rs 58,767 crore on urea or nearly 75%).
Even as the Government has made no credible effort to address the flaws in the extant policy, approval of a special price for urea to be produced by TFL gives a clear signal that this will continue. This will be one more add-on to the ‘special prices’ that the NPS assures to each of the 30 manufacturing units. In fact, given the huge investment of close to US$ 2 billion, the likely price for TFL urea will be substantially higher than even the highest US$ 350 per ton being given to an existing plant. Apart from further bloating the subsidy bill, resulting more supplies available at a mere US$71 per ton will aggravate excessive urea use.
The special treatment is sought to be justified on three grounds viz. (i) in India, coal is available in abundance, hence uninterrupted supply is assured and price stable; (ii) it will increase domestic supply of urea and reduce import; (iii) reduce dependence on imported LNG (liquefied natural gas). All the three grounds are untenable.
As for (i), this fact is known for ages. Keeping ample indigenous supplies in mind, two coal based plant were set up at Ramagundum (erstwhile AP now in Telangana) and Talcher in late 70s/early 80s by the FCI. But, their operations never got stabilized. Those were babies born sick even as successive governments kept them on ventilator spending thousands of crore from the budget. Meanwhile, a revival plan for Talcher approved by then UPA – regime in April 2007 languished for 6 years. In September 2013, it was resurrected and two joint ventures (JVs) were formed involving GAIL/CIL/RCF/FCI to implement it. That plan languished yet again. Now, it is the turn of Modi – Government which hopes to see it happening by September 2023 (subject to permission from Covid – 19).
As regards (ii), this argument does not inspire when viewed in the backdrop of Modi’s clarion call (the 38th edition of “Mann ki Baat” on November 26, 2017) for reducing urea use by 50% by 2022. In sync with this, the consumption of urea should decline from about 30 million ton in 2016-17 to 15 million ton by 2021-22. This would mean that even with current domestic production at about 24 million ton, there would be a surplus of 9 million ton. So, India does not really need any increase in supply be it from TFL or any other new or revival project.
As for (iii), this too can’t be seen in isolation from ‘how we want to see the demand-supply unfolding’? If, the Government is really serious about reducing urea use to the desired level and even curbing diversion (this will chop off more of demand), then it can afford a significant reduction even in the current domestic production of 24 million ton and yet, fully meet the requirement. This will automatically reduce dependence on gas import – currently at 1/3rd.
The problem with our policy makers is that they recognize the problems and even assert that these need to be addressed; but when it comes to action on ground zero, they stick to status quo. This is precisely what they have done while sanctioning the mega-size urea plant at Talcher – besides revival of other sick PSU plants at Sindri (Jharkhand), Gorakhpur (Uttar Pradesh) and so on, each one of them will be eligible for a special price under NPS.
The driving force behind these actions is sheer populism even as the dire need to rein in subsidy or curb excessive urea use/misuse is put on the backburner. No wonder, long pending reforms such as urea decontrol, direct benefit transfer (DBT) needed to address these maladies will remain on paper eternally.