Despite Govt’s announcement to privatise the CPSUs, the fertilizer units remain under its control as fertiliser availability is a politically sensitive issue
In the Budget for 2021-22, Finance Minister Nirmala Sitharaman had announced the government’s approach to privatisation of Central public sector undertakings (CPSUs). Privatization occurs when it sells its majority shareholding (more than 50 percent) in the CPSU and transfers control to a private entity.
For this purpose, it divided CPSUs in two broad categories—i.e. strategic and non-strategic. The strategy covers four subgroups: atomic energy, space and defense; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. The non-strategic category includes all other sectors such as industrial and consumer goods, hotel and tourist services, trading, and marketing.
While, the government wants to sell CPSUs in the strategic sector with the caveat that at least one (and a maximum of four) will be retained in the public sector, it will privatise ‘all’ undertakings in non-strategic sectors. All loss-making undertakings in the latter category will be closed.
In the follow through, the Department of Public Enterprises (DPE) and Niti Aayog identified 176 CPSUs in the non-strategic sectors and have recommended that over 60 percent of them or 106 be wound up, while the rest, considered “viable units,” be privatised. But, so far there has hardly been any progress except the steel sector.
While, generally, there is resistance from the top brass within the establishment, the ministry of chemicals & fertilisers, has categorically opposed privatisation of undertakings under its ambit. The DPE/Niti Aayog had recommended privatisation of all the nine CPSUs under the fertiliser ministry, including Madras Fertilizers Limited (MFL) and National Fertilizers Limited (NFL).
Leveraging government’s majority ownership and control, the bureaucrat in the concerned ministry for long has been used to calling the shots in the running of the CPSU including day-to-day interference in their management and seeking favors under a variety of quid pro quo arrangements. So, he won’t let this power go away easily which is inevitable when it is privatized.
This applies to the entire bureaucracy. However, in view of political bosses having taken the decision, the resistance has to be overcome sooner than later. But, why is the ministry of chemicals & fertilizer opposing privatization?
First, being a crucial input used by farmers for increasing production of foodgrains, fertilizers are politically sensitive (in his speeches, Prime Minister Narendra Modi has often referred to shortage of urea under earlier regimes which hasn’t been seen during his tenure) and the ruling establishment can’t afford to take any chances when it comes to ensuring their adequate availability in every nook and corner of the country. In this backdrop, if the government has manufacturing units directly under its control, it can always ask them to increase production whenever it apprehends a shortage. This won’t be possible if all these are in private hands.
If that is the thinking then the forward is for the government to classify fertilizers as a ‘strategic’ sector which allows for the possibility of retaining a maximum of four undertakings in the public sector and thus help address the aforementioned worry. Is that really necessary? The answer is clearly ‘no’.
Already, ‘adequate’ and ‘effective’ mechanisms are in place to prevent occurrence of a shortage situation. The requirement of all fertilizers for each cropping season i.e., kharif (April to September) and rabi (October to March) is assessed by the Department of Agriculture and Cooperation (DoAC) in consultation with Department of Fertilizers (DoF), states, railways and fertilizer manufacturers. It is broken down month-wise. The supply, movement and distribution of all fertilizers is monitored through online web based “Fertilizer Monitoring System (FMS).
In this comprehensive exercise involving all stakeholders including the manufacturers, the government can always direct any plant even if it is privately owned to increase production/supplies to meet shortage if any. The latter can’t say ‘no’ all the more because he depends on the former for subsidy support given as reimbursement of the excess of the cost of production and distribution over the maximum retail price (MRP) set at a low level.
Second, India imports 25-30 percent of its urea requirement. Urea is imported only through designated state agencies, primarily CPSUs such as the NFL. It could be argued that asking PSUs to import urea ensures more effective management of such supplies which will be jeopardized if the government has no fertilizer enterprise left within its fold (post their privatization). This argument is specious.
India also imports non-urea fertilizers where the dependence on import is much higher viz. dia-ammonium phosphate (DAP): 50 percent; muriate of phosphate (MoP): 100 percent. Their imports are not channelized through state agencies/CPSUs even as any entity is free to import DAP and MoP. Yet, the country hasn’t faced any shortage of these fertilizers. Likewise, even when urea import is left to private entities, there won’t be any problem.
Besides, channelizing imports through CPSUs is pregnant with the risk of politician-bureaucrat-business nexus triggering inflated payments to exporters in exchange for commission. For instance, in the 90s, ‘NFL making payment of millions of dollars for urea that never arrived’ made headlines.
Third, under the New Pricing Scheme (NPS) of allowing cost and in turn, subsidy (cost minus MRP) for urea, the bureaucrat determines how much of each of the cost components such as capital related charges or CRC (these include interest cost, depreciation and return on shareholders funds), other fixed cost, cost of gas and other inputs, etc., is to be allowed for subsidy payment to each unit. Generally, units under CPSUs are allowed higher cost and higher subsidy on every ton of urea produced to accommodate their inflated expenses.
For instance, six years back, Modi – Government had approved revival plans of five plants under the Fertilizer Corporation of India Ltd (FCIL) and the Hindustan Fertiliser Corporation of India Limited (HFCL) viz Sindri (Jharkhand), Gorakhpur (Uttar Pradesh), Barauni (Bihar), Talcher (Odisha) and Ramagundam (AP). For decades, these plants had been on the ventilator guzzling thousands of crores of taxpayers money. Their revival couldn’t be justified on financial viability considerations; yet, their revival was approved due to their location being in politically sensitive areas.
Entailing an investment of around Rs 40,000 crore, these plants were commissioned in 2021/2022. Given the high CRC associated with the high invested capital (Rs 8000 crore per plant on an average), their viability can be protected only if they continue to get inflated retention price under the NPS. The big question is, will they continue to get the same treatment even after their disinvestment? If not, the government won’t get suitors.
The investors could come in only if the valuation is kept low. But, that won’t be anywhere near the money invested in their revival. Such a deal could invite criticism. The dilemma could be behind the fertilizer ministry opposing privatization.
To conclude, the concern on account of securing adequate supplies – whether from domestic production or import – is unwarranted. As for disinvestment of CPSUs housing high-cost plants, the government will have to take a tough call. It should tell the suitor upfront that the inflated price under NPS won’t continue. In lieu of this, it may accept low valuation, a price worth paying now if only to avoid the pitfalls of retaining the undertakings under public sector fold. Finally, the government should unshackle the process of share sale from bureaucratic red tape.
(The writer is a Policy Analyst)
https://www.dailypioneer.com/2023/columnists/govt-must-push-to-privatise-fertiliser-psus.html
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