Union Minister for chemicals and fertilizers, Ananth Kumar has announced government’s decision to revive five closed plants of Fertilizer Corporation of India [FCIL] and Hindustan Fertilizer Corporation Limited [HFCL] viz. Talcher [Odisha], Ramagundum [Telengana], Sindri [Jharkhand], Barauni [Bihar] and Gorakhpur [Uttar Pradesh]. To be commissioned by 2020-21, their revival is expected to add 7.5 million tons [mt] of urea capacity.
Kumar has also exuded confidence that the decision of the government to make neem coating of urea mandatory [2015] will result in 10% improvement in the efficiency of fertilizer use. Taking urea consumption of about 33 mt annually, this will result in saving of about 3.3 mt.
The minister also referred to steps aimed at enticing manufacturers to increase utilization of existing capacity. This resulted in lifting production from 22.5 mt during 2014-15 to 24.5 mt in 2015-16 – an increase of 2 mt. During 2016-17, production is estimated to be slightly lower at 24.3 mt.
There is a fourth factor. This pertains to elimination of urea diversion to chemical factories or smuggling to neighboring countries due to neem coating which renders it useless for any purpose other than agriculture [as repeatedly mentioned by prime minister in his speeches]. Taking diversion at 30%, additional supply to farmers consequent to its elimination will be about 10 mt [33×0.3].
Connecting all dots, the government will have an extra cushion of 20.8 mt [7.5 mt: revival of closed plants, 3.3 mt: better use efficiency and 10 mt: stoppage of diversion]. After wiping off current deficit of 8.7 mt [demand 33 mt vs production 24.3 mt] and incremental demand of 4.5 mt [@5% per annum and subsuming 10% use efficiency], three years from now, India will have a surplus of 7.6 mt.
What a wonderful transformation it would be – from a huge deficit of 8.7 mt [2016-17] to huge surplus of 7.6 mt during 2020-21! The projected scenario appears to be too good to believe. It is therefore necessary to do careful scrutiny of the expected contribution from each of aforementioned source.
At the outset, let us take up the impact of mandating neem coating of all of urea supplies [from domestic production and imports]. This order was issued two years ago [2015]. Now, if Modiji is to be believed ‘complete stoppage of all diversion’ then, by now all of the diverted quantity i.e. 10 mt would have been available to farmers. Correspondingly, import would have reduced to zero.
Yet, during 2016-17 [April – January], India imported about 5.2 mt. The import during 2015-16 [April – January] being 8.1 mt, this is a drop of about 3 mt. Since, a good portion of this is due to higher domestic production, the contribution of plugging diversion is even lower. Clearly, neem coating has not made the desired impact.
There are two major reasons for this. First, it is next to impossible to track and monitor 660 million bags [20 bags of 50 kg each in a ton] of urea for checking compliance. Second, government has not yet addressed the most potent cause behind diversion. It continues to control maximum retail price [MRP] of urea at an artificially low level [1/3rd to 1/4th of market price] which propels trader to indulge in diversion.
As regards, increase in efficiency of fertilizer use [albeit by 10%], one wonders how this could be achieved in the face of continued imbalance in use caused by distortion in pricing and subsidy policy. The government gives much higher subsidy on urea [main source of N] vis-a-vis complex fertilizers [source of P and K nutrient]. This makes former much cheaper than latter prompting farmers to apply more of N when compared to P&K thereby causing imbalance.
On revival of closed plants, we should not loose sight of the historical perspective. These plants have remained closed for more than one-and-a-half decade. In the past, several attempts were made to resurrect them [decisions taken by the cabinet for actual execution apart from umpteen committees which submitted proposals for their revamp and restructuring] but failed to go beyond the drawing board.
Clearly, the past does not instill confidence. Whether the revival plan mooted by Modi – government will actually take off, remains to be seen. Prima facie, the mammoth investment Rs 50,000 crores [Rs 30,000 crores on setting up of projects plus another Rs 20,000 crores on setting up terminal for handling imported liquefied gas and laying down of pipelines to reach gas from terminal to plant locations in the east] needed to make it happen leaves one with serious doubt.
Given the requirement of fiscal prudence in the context of stiff fiscal deficit target [2.5% of GDP by 2022-23], it is unlikely that the government will provide any budgetary support. Ananth Kumar has alluded to roping in cash rich public sector undertakings [PSUs] in energy and oil sector viz. Indian Oil Corporation [IOCL], Coal India Limited [CIL], National Thermal Power Corporation [NTPC] and Gas Authority of India [GAIL] purportedly to fill the funding gap.
This is a dangerous idea as each of these undertakings already have huge investment commitments in their own core sphere of operation to achieve the assigned targets [consistent with the requirement of double digit growth in GDP]. Now, if they divert their cash to funding of fertilizer projects, it will be at the cost of compromising those targets. It is tantamount to ‘robbing Peter to pay Paul’.
The bigger question we need to ask is that even after commissioning [at such huge cost to other PSUs] whether the revived plants would be able to maintain their viability under the new policy environment of urea decontrol and payment of subsidy directly to farmers [as already committed by Team Modi]. Given the high capital cost associated with revival projects, the production cost of urea from these will be much higher than other units as also import; hence unviable!
In sum, a major slice of the projected cushion of 20.8 mt is unlikely to see light of the day. Therefore, India will continue to remain in deficit substantially and depend on import to make up.
To get things right, the government should take steps to correct extant policy distortions, align policy dispensation for urea with that of complex fertilizers and implement direct benefit transfer by crediting subsidy in to farmer’s account [not the way, it is done in pilot projects being run currently in 11 districts]. Without these, it will only be building castles in the air.