On May 13, 2015, the government approved a so called ‘Comprehensive new urea policy’ which seeks to (i) promote energy efficiency; (ii) maximize indigenous urea production and (iii) reduce subsidy burden on the budget.
At present, under the new pricing scheme (NPS) in vogue since 2003, each of the 30 urea manufacturing units gets a retention price (or ex-factory price) based on production cost specific to it. Since, all of them are required to sell urea at ‘uniform’ controlled price which is lower, the difference is reimbursed as subsidy.
Initially, NPS was designed as a group-based uniform pricing scheme whereby each unit in a given group [6 groups were carved out depending on feedstock and vintage based on recommendation of expenditure reforms commission (ERC) in 2000] was to get the same subsidy/concession amount. This was mooted as a bridge leading to eventual decontrol of urea and poor farmers getting direct subsidy support from government.
ERC had in fact proposed a 5 year road map for all this to happen and to ensure that transition was smooth, it even commended that selling price of urea be increased @ 7% per annum so that farmers get gradually acclimatized to realistic (read cost based) price level avoiding sudden jolt affecting consumption.
But, the grouping concept remained on paper. NPS re-lapsed in to a unit-wise dispensation. The system continues till date despite their being no compelling reason as unlike in past, when plants were based on a variety of feedstock viz., gas, naphtha, fuel oil/LSHS etc leading to widely different cost structures, at present all plants run on gas except three [Madras Fertilizers Limited (MFL) and Southern Petrochemicals & Industries Corporation (SPIC) and Mangalore Chemicals & Fertilizers (MCF)] which are on naphtha. The new policy extends this by 4 years viz., 2015-16 to 2018-19.
The government has also refrained from touching urea selling price which was increased only once (2010) during last one-and-half decade. However, there is a mark up of Rs 14 per bag – on current price of Rs 268 per bag – to allow producers recover from farmers the cost of ‘neem coating’ which is mandatory for 75% of production and can go up to 100%.
So, what is so comprehensive about the fertilizer policy approved now? The government has revised specific energy consumption norms for units based on ‘a combination of norms under previous NPS and average energy consumed in the last 3 years’. To understand the implications, let us look at the following:-
The fuel cost allowed under RP is energy norm say, ‘X’ million Btu (British thermal unit) needed for a ton of urea multiplied by delivered cost at factory-gate say ‘Y’ in Rs per million Btu. Both ‘X’ and ‘Y’ are unit-specific. When ‘X’ is revised based on performance in last 3 years, a unit which did not do well will continue to get a higher price tag whereas a unit which improved over its previous norm, would have its efficiency improvement mopped up.
Therefore, instead of incentivizing reduction in energy consumption, the methodology for fixing new norms penalizes units who have actually reduced and puts no pressure on others who made no efforts to improve. The policy would have served intended purpose if only all units had been benchmarked to common energy norm which was the intent of ERC but never practised.
As regards incentivizing domestic production, the policy provides for giving to a unit – producing in excess of a cut-off level at 110% of its re-assessed capacity – an amount equal to ‘variable cost plus part of the fixed cost’ or import parity price (IMPP) whichever is lower. So, how does this compare with extant policy under which it is reimbursed @ 85% of IMPP?
Due to shortfall in availability of domestic gas, units are forced to use imported LNG which until last year was very expensive much in excess of US$ 10 per mBtu (against price of domestic gas US$ 4.2 per mBtu prior to Nov 1, 2014 and US$ 5.6 per mBtu there after). This led to fuel cost alone exceeding 85% of IMPP and hence, no incentive to produce in excess of cut-off level.
Since then, two favourable developments have taken place. First, price of imported LNG has declined in tandem with decreasing global crude price. Second, from April, 2015, the government has put in place a uniform gas pricing policy to ensure supply of gas from a pool (of domestic and imported LNG) at ‘uniform’ delivered price to all urea manufacturers.
With this, under existing policy (read @ 85% of IMPP) units would have got good incentive to produce more. But, by mooting ‘variable cost plus part of fixed cost’ or IMPP whichever is ‘lower’, a clever bureaucrat has quietly taken away this extra cushion. How much of incentive would get killed as a result will depend on precise numbers to be allowed towards fixed cost for each unit.
What about saving in subsidy? Over 4 year period viz., 2015-16 to 2018-19, government expects a saving of around Rs 2600 crores due to changes in energy consumption norms and Rs 2200 crores due to increase in domestic output (about 2 million tons) substituting higher cost imported urea. Even if these materialize (unlikely), an annual saving of a little over Rs 1000 crores will be pittance in an overall subsidy bill of Rs 73,000 crores (2015-16).
While, winds of reforms are sweeping all other sectors, it is ironical that fertilizers remain un-touched. This is despite government knowing very well that maladies afflicting this sector viz., serious imbalance in fertilizer use, worsening soil health, rampant misuse of subsidized urea, ballooning subsidy, a big slice of subsidy accruing to rich farmers and a stagnant industry owe their origin to existing convoluted regime of controls.
The controls are so deep rooted that how much profit a company will makes or its viability depends solely on bureaucrat who sets norms and determines retention price. It is a typical case of micro-management by fertilizer ministry of each and every aspect. No wonder, in last 15 years not a single new grass root or brown-field urea project has been set up and none of the big names in Indian industry [leave aside foreign direct investment (FDI)] are keen to invest in fertilizers.
It is argued that once urea is coated with neem, it cannot be diverted for industrial use. Technically, the reasoning may look convincing but who will do the policing? Who will check each bag (we are talking of a colossal 600 million bags of 50 kg)? Even so, mandatory requirement is 75%; so dubious persons would still have 150 million bags still to play around.
The real reason for diversion of urea to industrial use, smuggling to neighbouring countries, black marketing and its excessive use is its ridiculously low selling price. It is a paradox that Modiji who is known for his tough stance on reforms is unable (or un-willing) to allow even modest increase in the price which if suitably calibrated will solve all these problems at one go.
He wants every farmer to have a soil health card so that latter knows how much nutrient he will need to apply for getting good crop yield and keep soil healthy and robust. Yet, he is keeping in tact present dis-jointed policies for urea vis-a-vis non-urea fertilizers – a prime cause of imbalance in fertilizer use . Why does he not implement nutrient based scheme (NBS) for urea to bring parity with policy dispensation for non-urea fertilizers?
In the past, staying with unit-wise pricing was justified on the ground that plants were based on different feedstock and even within same feedstock category, there were differences in delivered cost. Now, the industry is homogeneous with almost all plants on gas and even its delivered price is uniform. Then, what is preventing government from putting in place uniform pricing for urea?
The government has declared its intent to bring fertilizers under direct benefit transfer (DBT). This is necessary for better targeting (to poor farmers) and curbing leakages. For this to happen, government should first stop giving subsidy to manufacturers. Yet, by announcing continuation of extant fertilizer policy for 4 years, it has correspondingly deferred DBT.
It is evident that prime minister’s intent is not getting translated in to action. There is a big dis-connect between PMO and fertilizer department. Bureaucrats are either not in sync with Modi’s philosophy of a ‘policy driven’ state (with no room for discretion) or they are wilfully perpetuating status quo to stay relevant.
The government should immediately go for a course correction. The way forward is to implement NBS for urea and allow free float of its selling price. The uniform subsidy may be so fixed to prevent steep increase in price in one shot. After keeping NBS in vogue for 2 years, it may switch to DBT and at that stage also free up urea imports for increased supply at competitive prices.