On the eve of its Annual Seminar [2018], the Fertiliser Association of India [FAI] – an umbrella organization of all fertilizer manufacturers/importers – has reiterated its demand for removing controls on the fertilizer industry. It has also asked the government to give subsidy directly to the farmers instead of routing it through the manufacturers as at present.
In case however, the government continues with control and routing subsidy through the manufacturers then, it demands a fair deal in terms of admissibility of various elements of cost viz. fixed cost, feed/fuel and other costs under the New Pricing Scheme [NPS] for determining the subsidy amount to be reimbursed to them.
Further, considering that the maximum retail price [MRP] of urea is lower than the cost of production leaving a substantial gap [nearly 2/3rd – 3/4th] to be covered by way of subsidy, FAI wants that subsidy payments to manufacturers be made in time. In case of delayed payments, the government should fully compensate them towards the interest cost for the period of delay.
Most importantly, the manufacturers should get 12% post-tax return on net-worth which is guaranteed under the NPS subject to a unit achieving the prescribed norms for capacity utilization and consumption of feed/fuel. This was provided for in the notification on introduction of Retention Pricing Scheme [RPS] way back in 1977 and has since stayed on then rule book even as the scheme was rechristened as NPS in 2003.
This stance of the industry resonates in almost every Annual Seminar of the FAI and other important fora yet, neither the policy makers heed to its demand for decontrol nor, give it a fair deal while retaining it under a controlled dispensation.
Unlike industries operating under decontrolled environment where manufacturers enjoy enough leeway to navigate margins, in fertilizers, this is not available. True, if a unit operates at a higher capacity utilization than the norm or achieves lower consumption than the threshold then, it should be able to earn a return even higher than the guaranteed 12% post-tax. But, this is theoretical.
Despite operating at levels better than the norms, manufacturers are far from achieving even the promised return. More than half of the urea units are incurring loss even as others are operating on thin margin. During 2016-17, 25 units, as a whole, incurred a negative return of 0.73%. For 2017-18, it was minus 4.71%. This clearly reflects progressive tightening of the norms over the years.
As against 80% capacity utilization norm fixed in 1977, now this is raised to 98% of the reassessed capacity. This has led to huge under-recovery of fixed cost [FC]. For instance, if the initial assessed capacity was 100 tons, then a unit needed to produce 80 tons to fully recover the FC. With capacity re-assessed to say 110 tons, it will have to produce 107.8 tons [98% of 110] for full recovery. So, the admissible FC is reduced by 26% [1-80/107.8].
The NPS launched in 2003 [replacing unit-wise RPS] was intended to be a group-wise scheme. Under it, a uniform FC is allowed to all units in a group. But, this principle was undermined by reimbursing individual units using the group average or actual of the unit whichever is lower. This has further increased the under-recovery.
The FC has not been updated since 2002-03 despite increase of over 100%. In April 2014, a small increase of Rs 350 per ton was allowed under Modified NPS – III policy to partly cover the increase in 4 selected items of fixed cost.
Under NPS, it was decided that the government would neither mop up energy efficiency improvements nor recognize additional investment made in bringing about these improvements. Yet, after 2003, energy efficiency gains were mopped up 4 times even as the additional investments were not recognized.
Finally, there have been delays in payment of subsidy to the manufacturers. This is largely due to woefully inadequate provision in the budget. For the current year, the allocation is Rs 70,000 crore even as the requirement is higher by Rs 14,000 crore – mainly due to 34% increase in gas price. Besides, there are pending dues of more than Rs 30,000 crore from previous year [including Rs 4000 crore due to hike in FC w.e.f. April 2014].
The interest cost of funding working capital locked in subsidy dues – not reimbursed by the government – further dents the profitability of manufacturers.
The aforementioned tightening of the pricing norms, denial of legitimate cost and delayed payment of subsidy dues have combined to push the industry into dire financial straits. This in turn, has led some big players such as Tata Chemicals Limited [TCL] to sell their fertilizer assets at depressed price. Others viz. Indo-Gulf Fertilizers [IGFL] could not do it due to lack of investor interest.
The government’s retrograde moves are an offshoot of its obsession to save on subsidy outgo per se without analyzing the causes behind it. The causes have to do primarily with its unwillingness to increase urea MRP on one hand and increase in cost of feed/fuel on the other. The approach is flawed as it only ends up affecting the health and growth of the industry even as subsidy increases unabated.
If, the government cannot be fair to the industry, why does it not decontrol urea and give subsidy directly to farmers? But, it won’t do that either as then, the price will shoot up which is politically unpalatable. Giving them cash to offset higher price is the way forward. Here again, it risks inviting their wrath if the money does not reach them in time which is inevitable in view of inadequate budget allocation.
In 1992, the then Narasimha Rao government had tested the waters when – under pressure from IMF/World Bank – it decontrolled non-urea fertilizers. Within 5 weeks, it restored subsidy albeit at a uniform rate but continued to route it through manufacturers as it could not muster the courage of giving it directly to farmers.
Today, the technology may have put the current dispensation in a vantage position, but the underlying forces continue to be against delivering subsidy directly to farmers.
ALAS! The government is unlikely to accede to FAI demand.