Amidst all the bad news on the economic front under a prolonged lockdown, the meteorological department has come out with some good news for fertilizers – the most crucial agricultural input that help in increasing crop yield. The department has predicted normal monsoon with the country as a whole receiving 100 per cent of the long period average (LPA) of 88 centimetre rainfall.
This together with substantial increase in cash in the hands of farmers [record procurement of wheat by government agencies viz. Food Corporation of India et al at the minimum support price (MSP) alone has given them about Rs 40,000 crore; direct income support of Rs 2000/- each to about 9 crore farmers under PM KISAN yielding Rs 18,000 crore and Ex gratia of Rs 500 per month to 20 crore Women Jan Dhan account holders or Rs 30,000 crore over a period of 3 months – most of it accruing to farm households] bodes well for boosting fertilizer demand as farmers prepare for Kharif sowing.
But, there are the supply side constraints even as the government is unwilling to leverage positive spin-offs from the Corona crisis to bring about big bang reforms in the sector.
The maximum retail price [MRP] of fertilizers being under control at a low level and excess of cost of production and distribution reimbursed as subsidy to manufacturers, their operations are hamstrung by delays in subsidy payment by the government. Even in normal times, the latter has been prone to delaying payment and even making short payment. It does so with a view to cut its expenses on subsidy [the savings are not real; it is just that the government decides not to pay so that it can show that it has stuck to the fiscal deficit target]. The pain of this skullduggery is borne by the manufacturers.
This results in pile up of subsidy receivables in their books that runs in thousands of crore. At the beginning of 2019-20 fiscal, these dues were over Rs 30,000 crore. By the end of the year, these had doubled to Rs 60,000 crore. During 2020-21, faced with steep decline in tax revenue [courtesy, Corona] forget clearing the backlog, the government may even sharply reduce amount allocated [Rs 71,309 crore] for the current year. Consequently, the year will end up with further increase in pending dues.
The blockage of such gargantuan sums squeezes the cash flow of manufacturers forcing them to borrow at high interest rates for continuing their operations. Since, the extra cost of these borrowings remains un-compensated under pricing and subsidy mechanism, this erodes their profit margin.
Large-scale destruction of demand caused by world-wide lockdown has led to a big drop in the price of crude by about US$ 40 per barrel. This has led to corresponding reduction in the price of natural gas; imported gas by about US$9 per million British thermal units [mBtu] and domestic gas by US$3 per mBtu. About 90% of urea production in India is based on natural gas with nearly 2/3rd of gas supply from domestic source and balance 1/3rd imported gas. The effective drop is US$5 per mBtu [9×0.33+3×0.67] which will reduce urea production cost by about Rs 9000/- per ton.
This offers a good opportunity to unshackle the urea industry. The government can remove control on MRP and give subsidy directly to the farmer using direct benefit transfer [DBT] – reform that has been pending for long. Under a decontrolled regime, even as manufacturers sell at market based price, it will be a modest hike over current MRP; courtesy, lower gas price. Besides, this will propel competition and lead to across the board improvement in efficiency and reduced cost which will eventually be passed on to consumers by way lower price. But, this is wishful thinking.
Given the politics of populism which has been played to its absurd limits in the past [urea MRP has not been increased during the last 2 decades or so], even a small increase in the price is bound to be met with resistance. In this backdrop, the government may not pick up the gumption to go for it.
The minister for petroleum and natural gas, Dharmendra Pradhan has expressed concern over the reduction in gas price observing that this could affect return to the producers of gas on their investment. He has also alluded to bringing about a change in the methodology of pricing domestic gas to make it attractive for producers and even set up a committee for this purpose. At present, the gas price is bench-marked to its price at 4 international locations which are driven by movement in crude price.
If, now the committee de-links pricing of gas from crude, then, the advantage accruing from reduction in the price of latter will be lost making former’s price downward inflexible. In other words, the gas price will remain high. This may please producers of gas viz. ONGC, OIL, RIL etc but it will ensure that production cost of urea remains high. It will foreclose the option of urea decontrol.
At present, the industry is hamstrung by an inverted duty structure. Fertilizers attract GST @5% even as the tax on raw materials and intermediates used in their manufacture is much higher.
Natural gas is at present ‘zero rated’ under GST implying that it continues to attract excise duty [ED] and value added tax [VAT] as in the past. Even as ED on gas is ‘nil’, VAT varies from state to state with a low of 5% in Rajasthan and high 21% in Uttar Pradesh. Imported gas attracts customs duty [CD] @2.5% even as ammonia, phosphoric acid and sulphur attract CD @5%. Ammonia and phosphoric acid attract GST @18% and 12% respectively.
We thus have an anomalous situation whereby on one hand, taxes paid on inputs used in the manufacture of urea is high, the tax liability on the output [read: urea] is low. This is not merely because of much lower GST @5% but also due to lower MRP [even as the excess of much higher cost is reimbursed as subsidy]. This results in un-absorbed input tax credit as output tax falls far short of input tax. The anomaly can be removed if only the current ‘zero rate’ status on gas is removed and GST on it is levied @5% i.e. the same as on fertilizers. GST on ammonia and phosphoric acid also needs to be brought down from existing 18% and 12% respectively to 5% on each.
The GST Council is seized of the matter. But, in view of the Corona crisis causing huge revenue loss to states, it is unlikely that the Council will take a decision on this too soon.
The sector is also grappling with increasing imbalance in fertilizer use which results in declining crop yield, deterioration in soil health and entails the risk of permanently impairing soil’s capacity to support farming besides affecting the environment. This is due to persistent discrimination against producers of phosphate [P] and potash [K] fertilizers.
Whereas, on urea, 50-75% of the production cost is subsidized, in case of P&K, subsidy is only 25-30% of the cost. In case of urea, the entire cost of movement up to the retail point is reimbursed, but P&K manufacturers get reimbursement only for primary movement [by rails from plant to the unloading rake point]. Further, even as the former get access to domestic gas on priority, latter are forced to import gas at much higher price.
There is urgent need to drastically reduce subsidy on urea and increase subsidy on P&K so that MRP of former is lifted and that latter lowered from their current high level. Further, P&K fertilizers need to be brought under a ‘uniform freight policy’ to provide for reimbursing cost of movement up to the retail point – as applicable to urea. Alternatively, the subsisting scheme of freight reimbursement for both fertilizer types should be dismantled.
This way alone, excess use of urea can be curtailed and those of non-urea fertilizers increased to result in reduced imbalance. In 2012, a committee under then agriculture minister, Sharad Pawar had recommended bringing the policy dispensation for the two fertilizer types at par. But, there has been no follow-up.
Alongside trumpeting ‘stimulus packages’, Modi has declared his intent to use Covid – 19 crisis as a trigger to implement big bang reforms. In fertilizers, despite a ‘golden opportunity’ knocking at its doorstep [read: rock bottom gas price which is likely to sustain for a couple of years], the government appears to be in no mood to crack the whip. Instead, it is seeking to kill this opportunity by looking for ways to somehow keep the gas price high.