The fertiliser industry, in India is slumping due to the burden on investors to sell at low price and delayed payment of subsidy dues by the Government
Last year, Tata Chemicals Limited (TCL) sold its urea business viz plant in Babrala, Uttar Pradesh to Yara Fertilisers India Private Limited [YFIL] — Indian arm of Norway’s Yara lnternational ASA — for a sum of Rs 2,670 crore. This was a distress sale. Then, it had also alluded to selling its complex fertiliser business (including Haldia unit).
Now, the TCL are in advanced negotiations with India-born Indonesian billionaire Prakash Lohia of Indorama Corporation to sell 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 fertiliser, leading to eventual exit. It had also restructured operations of two overseas plants (Kenya and the US), shutting down one and suspending operations at the other.
Kumarangam Birla too, is contemplating the sale of ammonia/urea plant under Indo Gulf Fertilisers in Jagdishpur.
Over three decades ago, when the mentioned plants were contemplated, both Tata and Birla were very upbeat about the prospects of fertiliser 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 and pricing, production/supply, movement and distribution, pricing of fertilisers (both at factory gate and farmer’s level) etc. The controls were imposed decades back purportedly to make India self-sufficient in fertilisers so that ‘timely’ and ‘adequate’ supplies are assured to farmers.
These were driven by the ‘socialistic’ philosophy which may have helped in initial years (decade of 1980s) but over the period have failed to serve the objective. Today, India is far from achieving self-sufficiency in fertilisers 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 fertilisers, which in turn, would jeopardise our food security. Luckily, the country is secure in food even without being self-sufficient in fertilisers; 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 100 per cent foreign direct investment (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, in regard to 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 and at a price as per specified formula. Even for imported gas, he has to depend mostly on the Gas Authority of India Limited — a public sector undertaking, 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 Essential Commodities Act (ECA) allocation, which is formulated by Centre and States via so called zonal conferences (held prior to each of the two 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 per cent of his urea production has to be ‘mandatorily’ sold as per movement and distribution plan finalised by the Center and the States. Even for the balance, 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 unrelated to production cost. It also fixes previous factory price (or retention price), which is expected to cover his cost plus give prescribed return on his equity capital. The earning 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 per cent of the previous factory price, 50-75 per cent of cost of supply comes as subsidy. Due to budgetary constraints and inadequate allocation the Government invariably delays payments. The manufacturers are thus, forced to borrow to finance subsidy receivables, the interest cost of which is not reimbursed.
On the other hand, the manufacturers of complex fertilisers are technically free to sell but under the ECA, the Government can lay claim on 20 per cent of their production. As regarding the MRP, though de jure, it is not under control, de facto, Centre notifies the price and expects manufacturers to comply. This prevents them from realising the expected return on investment. Like urea, producers of complexes too, suffer from delays in payment of subsidy dues.
Therefore, even post-DBT, obtrusive controls and stifling policy environment will remain intact. One can see more exit/slump sale of fertiliser plants in times ahead.
(The writer has a PhD in economics from JNU, Delhi)