Fertilizers – key to food security and sustainable agriculture
Food security is of paramount importance to meet the growing food needs of an ever increasing population. Not having sufficient domestic production of food to meet requirement of 1.25 billion plus and still expanding will not only put a huge burden on scarce foreign exchange resources but can also expose us to exploitation in global market. Hence, there can be no compromise on this overriding goal.
Agriculture has a share of around 15% in gross domestic product (GDP) and nearly 60% of population derives its livelihood from it. Industry and services sectors too depend heavily on it for their rapid and sustained growth. Therefore, agriculture needs to grow rapidly not only for ensuring food security but also for giving a boost to economic growth and increase income of millions of farmers and India’s entire population.
Land – a key asset for growing food – has been ever diminishing thanks to increasing population and increasing diversion for urbanization, infrastructure and industry. Our policy makers in 60s & 70s visualized what could be in store if this went un-attended! Hence, they made the required interventions. The buzz word was ‘How to get more from every unit of land?’
Government of those times latched on to new technology that combined use of HYV seeds, fertilizers and irrigation to give higher crop yield. Fertilizers provide the much needed plant nutrients viz., N, P & K and a host of secondary & micro-nutrients that make HYV work. Irrigation gives the much needed ‘moisture’ for process of flowering & grain making
A daunting challenge was to (i) make farmers accept new technology; (ii) make required quantity of fertilizers available and (iii) ensure that farmers can afford to pay. While, objective (i) was job of extension machinery, (ii) & (iii) were essentially a function of policy.
Unfolding policy environment
Fertilizer price control and subsidy
Production of fertilizer being highly energy and capital intensive, in an inflationary environment, its cost is unavoidably high. On the other hand, farmers a majority of them 83% being small & marginal, cannot afford to pay high price. If, fertilizer is priced high, farmers won’t buy. And, if price is kept low, that would make supplies unviable! Government resolved the dilemma by controlling maximum retail price (MRP) at a low level and assuring to producers a price that helped them remain viable. The difference was reimbursed as subsidy.
The producer prices and subsidy were administered through a scheme unique to fertilizers viz., Retention Price Scheme (RPS). Based on the recommendations of high power Marathe committee, RPS was implemented for urea in 1977; for DAP & other complex fertilizers in 1979 and for SSP in 1982.
RPS had a phenomenal success. Fertilizer consumption increased dramatically supported by increase in production in 80s. The trend was sustained in 90s. But, the Scheme came under attack on account of increase in subsidy per se; without analyzing its causes. The main causes were increase in cost of feedstock and other inputs on one hand and virtually no increase in MRP on the other besides increase in production and consumption.
For insights in to nuances of RPS, amendments from time to time, associated problems and its contribution, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/category/fertilizers/retention-price-scheme-rps/
Policy flip-flop for P & K fertilizers
In 1991, faced with an economic crisis, India had to approach IMF/World Bank who insisted on elimination of fertilizer subsidy within 3 years as a precondition for extending financial support. Accordingly, in August 1992, DAP/complex fertilizers & SSP were decontrolled and subsidy abolished. However, a month there after, subsidy was resurrected under a new incarnation viz., ad-hoc concession. Controls on MRP too were revived albeit indirect.
From April 1, 2010, all decontrolled fertilizers are covered by Nutrient Based Scheme (NBS). Under NBS, government fixes ‘uniform’ subsidy per nutrient N,P,K & Sulfur and producers have freedom to fix MRP as well. However, on June 26, 2013, government decided to fix ‘reasonable’ MRPs and manufacturers charging higher will be deemed to be ‘profiteering’ from the scheme.
The violations are penalized by way of denying subsidy to the extent of deviation of MRP actually charged from the ‘reasonable’ MRP or even exclusion of concerned product from purview of NBS. This tantamount to taking away flexibility to fix MRP albeit indirectly.
For a comprehensive account of policy changes in the P&K segment, amendments from time to time and their implications, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/category/fertilizers/concession-scheme-for-p-k/
Continued price control on urea
MRP of urea has been under control all thru. Producers are assured of ‘retention price (RP)’ and excess of this over net realization from sale at controlled MRP reimbursed as subsidy. However, manner of determination of RP has undergone several changes; from erstwhile unit-based RPS to New Pricing Scheme (NPS) viz., Stage I 2003-04; Stage II 2004-05 & 2005-06 and Stage III October 1, 2006 to March 31, 2010 which stands extended till date. Meanwhile, early this year, government revised fixed charges after a gap of 12 years (these were last revised in 2002-03).
In 2012, an empowered group of ministers (eGoM) decided that urea should also be brought under NBS and producers given freedom to fix retail prices on the same lines as the extant scheme for decontrolled P & K fertilizers. However, government is yet to act on this recommendation.
Mechanism for subsidy payment
Subsidy payments are made to manufacturers to enable them sell fertilizers at price lower than cost of production and distribution. 85-90% of the subsidy amount is paid to manufacturer on ‘receipt of material in district’. From November 2012, these payments are on confirmation of receipt of fertiliser by the retailer. Balance 10-15% amount is released on receipt of confirmation from the state regarding sale to farmers.
In Budget for 2012-13, government had announced tracking movement of fertilisers from retailer to farmers and linking part of subsidy payment to manufacturers to the sale of fertilisers to farmers by retailers. In the mid-year economic analysis of 2012-13, finance ministry came out with a blueprint on modalities for implementing the Budget announcement. Pilot projects in 10 districts spread over nine states were to be launched.
After successful implementation in these 10 districts, cash subsidy will be transferred to farmers in the next phase from April 1, 2013. Concurrently, tracking movement of fertilisers was be rolled out in the whole country. The DoF has developed a mobile and web application, a mobile Fertiliser Monitoring System (m-FMS) that provides information about stock position, sale and receipt of fertiliser till the last retail point.
While, tracking system has been put in place, government is yet to implement direct subsidy transfer to farmers.
For insights in to the dynamics of how a scheme of direct cash transfer would work, its positives and government’s stance, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/category/fertilizers/targeting-subsidies/
Policy for new investment in Urea
Wef September 4, 2008, Government had put in place a policy for new investment in urea sector. The policy prescribed methods for determining retention price (RP) for various categories viz., additional urea from revamp of existing units; expansion of existing units; green field projects etc. Revival of FCI & HFC group of plants was also covered under this policy.
Meanwhile, considering mute response to the above policy (only 2 million tons urea capacity was added through revamp of existing units), in 2012 government came up with a new version of urea investment policy (UIP). This went through a process of amendment in the following year and in early 2014, the Cabinet approved an amended UIP.
The amended UIP assures investors in new green field projects and revival projects of sick public sector units of FCI & HFC a price linked to import parity price (IPP) with a floor (F) US$ 305 per ton and ceiling (C) US$ 335 per ton. The prices correspond to gas price of up to US$ 6.5 per mbtu. Beyond this level, for each $ increase in gas price up to US$14 per mbtu, ‘F’ and ‘C’ would increase by US $ 20 per ton each. For increases beyond US$14 per mBtu, only ‘F’ price would apply albeit with full protection for gas cost.
For details on new urea investment policy (UIP), its implications with especial reference to impact on investment & growth of industry, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/fertilizers/the-urea-investment-policy-quagmire/
Feedstock and other raw materials in fertilizer production
The urea industry in India is heterogeneous with plants based on a variety of feedstock viz., naphtha, fuel oil/LSHS, gas. However, in view of its superior characteristics such as higher efficiency and being a much cleaner/environment friendly fuel, gas is the predominant feedstock. Currently, it accounts for around 80% of urea capacity. Supply of gas is regulated in accordance with priority for allocation laid down by government from time to time.
In P&K fertilizers, plants are based on a variety of raw materials viz., imported phosphoric acid and imported ammonia; domestic phosphoric acid and imported ammonia etc. SSP plants are based on imported rock phosphate (supplemented by domestic rock where available) and imported sulfur.
Controls on movement & distribution
From 1973, government controlled movement and distribution of all fertilizers under the Essential Commodities Act (ECA). In 1992, concomitant with removal of price control and abolition of subsidy on P & K fertilizers, movement and distribution controls were also withdrawn. However, controls on urea continued alongside price control.
From 2003, there has been some liberalization in the urea segment as well. Up to 50% of urea production is subject to movement & distribution control. However, states allocate entire quantity of urea arrivals – both regulated & unregulated & track up to district level. Urea import is allowed only through designated state trading enterprises (STEs) like MMTC, STC, IPL etc.
Even though, P&K fertilizers are free from movement and distribution control, however, 20% of this material is under movement control to service under-served areas. Import of these fertilizers is under OGL and companies are free to import. The same holds for raw material such as rock sulfur, phosphoric acid used in the manufacture of these fertilizers.
For a detailed account of how controls on distribution and movement evolved and their nexus with changing pricing policy and subsidy environment, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/category/fertilizers/distribution-controls/
Major challenges facing fertilizer industry
At 15% of GDP of US$ 2 trillion, the value of agriculture produce is around US$ 300 billion. During the last decade, agriculture grew @ 2.5-3% per annum. However, for 12th five year plan (2012-13 to 2016-17), Government has a set a growth target of 4% which needs to be sustained in future as well.
Urgent need to bridge increasing demand-supply gap
In view of ever decreasing land area under cultivation and reduction in average size of holding, such high growth can be achieved only by substantially increasing productivity of land. That can come about only through increase in fertilizer use and its efficient management. But, the Indian fertilizer industry is far from having the requisite capability to meet this challenge.
During the last one-and-a-half decade or so, hardly any investment has been made for adding to indigenous urea production capacity. As a result, out of a total demand of 30 million tons, around 8 million tons is met from imports. Of domestic production of 22 million tons, around 80% or 17 million tons is based on gas. Over 30% of the gas requirement is met from imported LNG.
In phosphate and potash, acute lack of natural resources leads to high dependence on imports which makes Indian industry highly vulnerable. Thus, we depend on imports to the extent of 85-90% in phosphates, 95% in sulphur and 100% in potash. The value of imports – finished fertilizer & raw materials/intermediates – is a staggering US$ 16 billion (2012-13).
The high import dependence often leads to our exploitation in international market which is cartelized by a few suppliers. For instance, during 2012-13, we were paying $ 400 per ton for MOP. Due to break-up of Russian-Belarus cartel in July, 2013 (it controls 40% of global potash market), the price dropped to a low of around US$ 320 per ton. But, one is not sure how long these lower levels will last as efforts are already on to resurrect the cartel.
Ballooning subsidy and under/delayed payments
From a very modest level of Rs 266 crores in 1977-78, fertilizer subsidy increased to Rs 4389 crores in 1990-91 and by 1998-99 it had crossed Rs 10,000 crore. In another decade down the line, by 2008-09 it had zoomed to Rs 100,000 crores mark. After some reduction in following 3 years, during 2012-13, it again crossed Rs 100,000 crores. During 2014-15 too, it is expected to hover around this tantalizing figure.
During the last two-and-a-half decade from 1990-91 to 2014-15, fertilizer subsidy has increased 25 times. Ironically, this is also the period coinciding with economic reforms when the government has consistently harped on fiscal consolidation with special emphasis on reining in subsidies including subsidy on fertilizers. Clearly, there was a total disconnect between what was preached and what was actually done.
Even the founding fathers of unit-specific retention pricing scheme (RPS) had not contemplated such a scenario. They intended the scheme to be a ‘pooling’ mechanism whereby plants whose retention prices (RP) was lower than realization from sale at controlled price would contribute to pool. Units whose RP was higher would receive money. This was not just theoretical. During initial years, RP of some plants viz., GSFC, Baroda; IFFCO, Kalol; HFC, Namrup were lower than MRP and they were contributing to pool. Then, where did things go wrong?
The genesis of the problem lies in steep increase in the price of feedstock/fuel and other inputs even as the government kept a tight leash on retail price of fertilizers. Between 1981 and 2012, urea price increased from ₹2,350 to ₹5360 per tonne, or 2.2 times. In contrast, price of gas went up from ₹0.32 per cubic metre to ₹8.4 per cubic metre, or 26 times. The price of naphtha went up from around ₹600 per tonne to ₹50,000 per tonne, or 83 times.
This led to a widening gulf between cost of production and realization from sales at controlled price. Juxtaposed with increasing quantum of production per se, this led to skyrocketing subsidy. The above mentioned fundamental causes behind increasing subsidy were never addressed in a credible and consistent manner. Yet, the government remained obsessed with subsidy reduction ‘per se’, courtesy fiscal compulsions!
During last 2 decades or so, mandarins in Finance Ministry have taken recourse to financial engineering that involved inter alia under-provision in Budget & postponing payments. Whereas, in 90s, under-provision used to be in Rs 500–2000 crores range, in first decade of 21st century and now in to second, these run in to several thousand crores!
In 2008-09, budget allocation was close to Rs 50,000 crores short of requirement. In 2011-12, under-provision was around Rs 17,000 crores. In 2012-13, this doubled to Rs 32,000 crores and in 2013-14, this was around Rs 38,000 crores. For 2014-15, interim budget has allocated Rs 68,000 crores. After meeting roll-over from previous year, only Rs 30,000 crores will be left barely adequate to cover payment for three months till June 2014..
Under-provision leads to suspension of payments, liquidity crunch and pushes plants to brink of closure. In 90s, manufacturers faced suspension in last quarter of a fiscal. Now, this happens much earlier e.g., from start of second quarter. Given government’s continuing obsession with fiscal deficit red lines, under-provisioning for subsidy will continue to rule the roost.
For insights in to how obsession with fiscal consolidation per se has led to shortfall in allocation for fertilizer subsidy and financial squeeze on industry, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/category/economic-outlook/fiscal-deficitsubsidies/
https://www.uttamgupta.com/fertilizers/fertilizer-bonds-a-manifestation-of-deeper-malaise/
Increasing imbalance in fertilizer use
In order to get maximum crop yield from fertilizer use and yet, maintaining soil health it is imperative that farmer applies all the 3 major nutrients N, P and K in the right mix. As a rule of thumb, agronomists recommend their use in a ratio of 4:2:1; ideally it has to be customized to soil and crop specific situations.
Unfortunately, by making fertilizers carrying P & K very expensive and urea – main source of N – artificially cheap, government policies have led farmers to apply excess of N and less of P & K. That led to increasing imbalance and the ratio at one point had gone up to 8.5:3.1:1 (1998-99). The current ratio at 8.2:3.2:1 (2012-13) remains heavily imbalanced.
All along, urea has been treated as a holy cow. In 1992, when, P and K fertilizers were de-controlled, urea was not. The latter remained under RPS, which has since been rechristened as NPS. For two decades, we have lived with different policy dispensations for urea on one hand, and P & K fertilisers on the other. These work at cross purposes. While NPS/RPS for urea encourages excessive use, NBS for P and K discourages their use.
This has skewed NPK fertiliser-use ratio towards urea, therefore progressively worsening the overall soil nutrient imbalances and also effecting crop yields. The Government is well aware of all this, as evident in its various policy documents. Yet, there is no corrective action.
An Empowered Group of Ministers (eGoM) had earlier recommended deregulating urea prices and bringing it under the nutrient-based subsidy (NBS) regime. A Committee of Secretaries (CoS) was, then, asked to work out the modalities of the plan, which is now practically shelved.
Due to continued dithering over coverage of urea under NBS and its MRP virtually frozen, NBS for P&K fertilizers which was hailed as a revolutionary reform has boomeranged. This is due to government’s stance of either drastically reducing subsidy on P&K fertilizers or at best keeping it unchanged. This has spiked their prices 3-4 times since 2010 even as urea MRP increased by meagre 10 per cent. This has aggravated farmer’s preference towards urea due to resultant imbalance in price ratio.
For an analysis of fertilizer policies moving in opposite directions and implications for imbalance in fertilizer use, pl refer to my article on my website link as under:-
https://www.uttamgupta.com/fertilizers/fertilisers-policies-pull-in-opposite-directions/
Shortage of gas and its high price
Gas is the predominant feedstock in production of fertilizers in India. Gas based plants account for about 80% of total urea production capacity of 22 million tons. Fertilisers get top priority in gas allocation. LPG is at number two and power gets the third slot. These priorities were reiterated by empowered group of ministers (eGoM) in its meeting held in July, 2013.
Yet, requirements of fertilizer plants are far from fully covered. Against requirement of 42 million standard cubic meter per day (mmscmd), they get 31 mmscmd including 15 mmscmd from KG-D6 fields operated by Reliance Industries (RIL) and 16 mmscmd from ONGC/OIL. The balance 11 mmscmd is met from imported LNG (liquefied natural gas).
Under a policy directive from the government, in 2012-13, five fuel-oil and naphtha-based plants were restructured and switched over to gas. They need 5 mmscmd, thus increasing the uncovered gap to 16 mmscmd. This much gas which represents about 30% of requirement is met from imported LNG. The situation will only deteriorate in years ahead.
As regards price, prior to 2007 fertilizer manufacturers were getting gas from ONGC/OIL under administered price mechanism (APM) at basic price of US$ 2.5 per million Btu (British thermal unit) plus marketing margin, transport charges, taxes and duties. In 2007, eGoM while approving a price of US$ 4.2 per mBtu chargeable on supplies from KG-D6, recommended that this be made applicable on supplies from ONGC/OIL as well.
Meanwhile, based on recommendations of Dr Rangarajan Committee in June 2013, the government approved a new structure of gas pricing that would result in doubling of price to US$ 8.4 per mBtu from April 1, 2014. This was despite strong opposition from fertilizer department (besides power) who brought out serious implications of hike. This will increase urea subsidy by about Rs 10,400 crores annually.
A Parliament’s Standing Committee (PSC) in its August, 2013 report had also strongly objected to cabinet decision. The committee wanted government to re-consider Rangarajan formula taking in to account cost of production approach. Yet, new pricing guidelines were notified on Jan 10, 2014. However, their implementation has been kept on hold in view of general elections and model code of conduct till May 16, 2014.
Meanwhile, in the gas sales purchase agreement (GSPA) for supplies from KG-D6, RIL has proposed that government fixed rate will be charged on gross calorific value (GCV) basis instead of current practice of charging on net calorific value (NCV). It also moots marketing margin of US$ 0.135 per mBtu on GCV basis. Thus, fertilizer units will have to pay US$ 0.935 per mBtu extra on account of switch from NCV to GCV. This will increase subsidy by another around Rs 2600 crores annually. .
For a comprehensive account of changes in structure and methodology of gas pricing and implications for fertilizer subsidy, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/category/oil-gas/
Addressing the challenges & way forward
Need for a long-term and stable policy for urea
Growth of fertilizer industry in India at the desired pace is hamstrung due to lack of a conducive, long-term and stable policy. Way back in 2000, the Expenditure Reforms Commission (ERC) had given a road map for wholesome reforms of fertilizers sector. Beginning 2001-02, implementation of ERC recommendations would have led to full decontrol by 2005-06 with proviso for subsidy to be given directly to the poor small and marginal farmers.
The road map envisaged a complete overhauling of the structure of fertilizer industry in a calibrate manner to include inter alia gradual increase in MRP of urea to eventually attain a level at which domestic manufacturers could compete with imported urea; pricing of feedstock on import parity basis (IPP); switch-over of all naphtha and fuel oil based plants to gas and removal movement and distribution controls. Unfortunately, none of the proposed changes have been brought about till date.
In the last 12 years, urea MRP was increased only once in April 2010 that too by mere 10%. Currently, at an abysmal low of Rs 5360 per ton, the price is less than half the production cost of most efficient gas based unit and less than one-fourth cost of imported urea. The cost of some naphtha based plants is nearly 8 times the MRP.
While, introduction of new pricing scheme (NPS) in 2003 was intended to be a precursor to uniform pricing, the reality is even today each of 30 operating units gets a specific price. NPS is a new incarnation of erstwhile unit-wise RPS. Urea investment policy (UIP) reinforces this trend by prescribing different price bands for various categories of investment viz., new Greenfield; revamp of existing plants; revival of FCI/HFC sick plants; brown-field projects.
The current highly segmented and differentiated approach to pricing of urea must give way to uniform pricing. The government should implement without further delay the eGoM recommendation for NBS for urea on same lines as for P&K fertilizers. Thus, all units will be entitled to a uniform subsidy on per kg N benchmarked to import parity price (IPP) of urea. As for P&K, urea manufacturers will be free to fix the MRP.
Once NBS is in place, much of the ad-hocism and incentives to target different segments will automatically go away. We will have ‘certainty’ of policy environment thus enabling big-ticket investment in capacity creation and reduced dependence on imports. Additional benefits will flow by way of reduction in cost, huge saving in subsidy and enhanced efficiency of fertilizer use by farmers.
There is no need for a separate new urea investment policy (UIP). All manufacturing units should be governed by the same policy dispensation. Even so, an earlier version of UIP that came in 2008 with more or less similar contours as present policy failed to enthuse investors. The latter too has not generated much interest despite being on the table for over 2 years now.
The real reason for lack of investor interest is continuing uncertainty of the policy environment, acute shortage of domestic gas and its high price and substantial under-provisioning for subsidy resulting in delayed payments and even under-payments. If these are addressed then, there won’t be any need for special packages to attract fresh investment.
For details on how NBS for urea will help attract investment, reduce imbalance in fertilizer use and rein in subsidy, pl refer to my article on my website link as under:-
https://www.uttamgupta.com/fertilizers/urea-pricing-government-must-walk-the-talk/
Need to streamline policy for P&K fertilizers
The biggest stumbling block in the way of promoting balanced fertilizer use thus far, has been different policy dispensations for decontrolled P&K fertilizers and urea working at cross-purposes with each other. The adoption of NBS for urea on the same lines as for P&K will remove this glaring anomaly.
However, this fundamental change in policy by itself will not generate required impulses for reducing imbalance. The government needs to follow it up by adjusting subsidy on urea in a manner such that the ratio of DAP/complex price to urea and MOP to urea is brought down to reasonable levels from the current high of 3.5 times and 3 times respectively.
Ever since NBS for decontrolled P & K fertilizers was introduced 4 years ago, a number of anomalies have crept in its implementation. The biggest irritant is fixation of so called ‘reasonable’ MRP, requiring manufacturers to submit cost data, identifying potential deviations from these benchmarks and penalizing them by denial of subsidy etc. This tantamount to resurrection of control on these fertilizers through the backdoor.
The real merit of NBS was that it allowed flexibility to manufacturers to set prices which was taken away vide the DoF office memorandum of June, 2013. While, this may have been prompted by some fall guys charging more than an amount justified by reasonable cost, they can to be punished through market forces. Government can also do necessary surveillance, call for details from those found over-charging and penalize them instead of subjecting the entire industry to avoidable harassment.
The government should shed its current mind-set of cutting corners merely to save some subsidy here and there. Whenever, there is drop in international price, the subsidy amount is cut. Considering that already the retail prices of P& K fertilizers are at an elevated level, the government should as a matter of utmost caution not reduce subsidy and allow the benefit of reduction in international price or rupee appreciation etc to be passed on to farmers through reduction in MRP.
For insights in to how DoF memorandum of June, 2013 has meant virtual return of license raj for decontrolled P&K fertilizers, pl refer to my article on my website link as under:-
https://www.uttamgupta.com/fertilizers/fertilisers-back-to-the-licence-raj/
Right pricing of domestic gas and ensuring adequate supply
For arriving at price applicable to all domestic gas, Rangarajan formula takes average of hub prices in USA and Europe and further averages these with net-back price of imported liquefied natural gas (LNG) in to India. The new price – to be revised quarterly – is expected to be US$ 8.2-8.4 per mBtu. The formula is disingenuous .
Due to tight global demand-supply balance and India’s heavy dependence on import, current LNG prices are exploitative. Net-back from its supplies to India and Japan is way above US$ 10 per mBtu. Since, two sets are clubbed, formula leads to steep increase in price to US$ 8.4 per mBtu. True, domestic production needs to be incentivized. But, to argue this will come only by giving operators today’s extortion price is not tenable.
Much of global trade in gas takes place at hub prices. These prices are reasonable and adequately protect supplier’s interest? On the other hand, price of imported LNG is an aberration and must not be included for determining producer’s price in India.
The oil minister, Mr Veerappa Moily recently opined ‘if US$ 8.4 per mBtu is not granted, domestic production will not increase and we would continue to import LNG at US$ 16 plus’. This is scaremongering. It is like telling a person to make a choice between the deep sea and the devil.
In June, 2013 meeting of the Cabinet, fertilizer and power ministers had strongly opposed the steep hike. Later, Finance Minister had promised to give concession to both sectors. Then, why increase price at all especially when these two use nearly 75% of domestic gas consumption?
Rangarajan formula based price is also out of sync with prevailing prices in other countries viz., US$ 2.6 per mBtu in Russia; US$ 3.5-4 per mBtu in USA and US$ 1.5 per mBtu in UAE.
Other principle is production cost plus reasonable return. For domestic gas supplies from ONGC/OIL, this was used for determining producer price as per Kelkar formula till 2007 but abandoned thereafter. Even PSC had asked government to re-consider its decision and examine cost of production. In this regard, a close look at some facts is in order.
Initially, oil ministry/DGH had approved capital expenditure of US$ 2.4 billion for 40 mmscmd in 2004. In 2007, this was hiked to US$ 8.8 billion for enhanced output 80 mmscmd. In 2011, this was reduced to US$ 5.6 billion.
1 mmscmd equals 10,000 million kcl. @ US$ 1 per mBtu or US$ 4 per mKcl (4 mBtu=1 mkcl), value of 1 mmscmd is US$ 40,000 or 0.04 million. This will yield US$ 14.6 million annually (.04×365). If, fields produce 80 mmscmd – as committed under PSC – total revenue would be US$ 1168 million (14.6×80).
Even at US$ 1 per mBtu, entire US$ 5.6 billion could be recovered in less than 5 years (5600/1168) (production commenced in 2009). Though, actual production was less than 80 mmscmd, outcome would be even better as price allowed was more than 4 times at US$ 4.2 per mBtu. In this backdrop, and entire investment already fully amortized, even if price is retained at US$ 4.2 per mBtu, operator would make handsome profits.
Clearly, structure of gas pricing that government wants to put in place from April, 2014 is flawed. It neither adopts market based principle nor follows global benchmark. And, it does not consider cost of production approach. A viable pricing system must reconcile concerns of both producers and users.
Whether, one considers global benchmark or production cost, there is no justification for increasing gas price beyond the current level of US$ 4.2 per mBtu. Further, in line with the practice followed all along, the price must continue to be on NCV basis (instead of GCV propounded by RIL).
The new government should take all necessary steps including removal of all regulatory hurdles to ensure availability of sufficient quantity of domestic gas to fully meet the requirements of the fertilizer industry.
For insights in to the flaws in methodology adopted for pricing of gas and logic for retaining price at existing level, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/oil-gas/gas-pricing-plunder-camouflaged-incentive/
RIL/BP/Niko exploit ‘fault line’ in Rangarajan formula – for a bonanza
Debate – Should gas prices be raised as per Rangarajan plan?
Reining in subsidy and reforming payments system
Subsidy depends primarily on cost of feedstock/fuel and other raw materials on one hand and selling price of fertilizers on the other. Since, gas is the predominant feedstock in urea production, if only its price can be fixed at reasonable level and availability of domestic gas assured in full at this price, that will make a huge dent on subsidy. Besides, bringing up urea MRP under NBS can also yield substantial saving.
At present, imported urea comes at a much higher price than cost of domestic production from gas based plants at prevailing price of US$ 4.2 per mBtu. This is testified by the fact that on import of around 8 million ton annually which is nearly one-third of domestic production of 22 million tons, the subsidy outgo is more or less the same. Consequently, giving a boost to domestic production based on reasonable gas cost will further reduce subsidy.
Government should make adequate provision in the budget to ensure timely payment of subsidy dues in full to the manufacturers. The practice of deferring substantial amounts year-after-year, issue of bonds in lieu of subsidy or manufacturers being asked to take loans from banks under so called ‘special banking arrangement’ must be shunned. These subject them to avoidable huge losses through discounted sale of bonds or interest cost.
The election manifesto of Bharatiya Janata Party (BJP) promises to bring about a fundamental change in the way subsidies henceforth will be administered. This is abundantly clear from its focus on ‘DELIVERY’ instead of ‘Doles’, a hallmark of erstwhile UPA regime.
Instead of the current approach of giving subsidy through fertilizer manufacturers to lower retail prices to farmers – which distorts markets, throttles competition, prone to leakages/ misuse and breeds inefficiencies – the government may consider the possibility of giving money directly to farmers.
This will be a revolutionary reform that will change the fertilizer landscape – all its segments N, P & K – in a way to yield rich dividends for all stakeholders viz., farmers, industry, tax payer etc.
The UPA government had promised to cover fertilizers under its direct benefit transfer (DBT) scheme and also done a trial run in 10 districts. Even the IT-enabled infrastructure for tracking movement of fertilizers up to the farmers level is in place. This should be kick started without further delay.
For insights in to the dynamics of how a scheme of direct benefit transfer would work, its positives and government’s stance, pl refer to my articles on my website link as under:-
https://www.uttamgupta.com/agriculture-foodgrain/cash-transfers-food-for-thought/
https://www.uttamgupta.com/fertilizers/lets-not-delay-direct-cash-transfer-of-subsidy/
Joint ventures in countries well endowed with resources for fertilizer production with buy-back agreement
Efforts to increase domestic production capacity using indigenous feedstock need to be supplemented by supply of urea from joint ventures (JV) set up in countries with abundant reserves of gas and where gas is priced much cheap. We need to build on the success of the JV in Oman where IFFCO and KRIBHCO are equal equity partners with Oman Oil Company (OOC).
Since, such JVs will be accompanied by buy-back agreement to bring production to India, implications with regard to compliance with our obligations under WTO need to be carefully analysed. The government should come up with a concept paper to guide appropriate course of action by stakeholders in both public and private sector to explore such opportunities.
Considering the vulnerabilities in P&K segment where India depends on import to the extent of 85-90% in phosphate and 100% in potash, government should also encourage setting up of JVs in countries where raw materials are available in abundance.
For insights in to the issues that need to be addressed for bringing fertilizers from JV under buy-back agreement in the context of India’s commitment under WTO, pl refer to my article on my website link as under:-
https://www.uttamgupta.com/wp-content/uploads/2013/05/Joint-venture-urea-project-in-Oman-Buyback-agreement-needs-a-fresh-look.pdf