"The finance minister's announcement in the Union budget to link concession for naphtha and fuel oil-based plants to IMPP of these feedstocks is regressive in nature and would lead to a surge in imports," sources in the Fertiliser Association of India (FAI) said.

Explaining the concept, they said Expenditure Reform Commission (ERC) had worked out a group-wise scheme and computed the concession rates under each group on the basis of the weighed average of retention prices (RPS) of individual plants under existing dispensation.

Consequently, introduction of the scheme will lead to significant reduction in realisation of units, with higher retention price (RP) than the weighed average and increase in realisation of those units, whose existing RP is lower than the weighed average.

In view of this, several plants could be closed and the resultant loss of domestic production could lead to heavy dependence on imports and consequently high prices in the international market.

They said implementation of the group-wise concessions cheme would not lead to any savings in subsidy, but merely result in its redistribution from plants having higher RP to those with lower RP than the weighted average.

But a subsidy reduction could come due to use of IMPP instead of the existing reasonable prices.

Sources said the reduction in budgetary subsidy on urea for 2001-02 by 16 per cent to Rs 7,956 crore from the revised estimate of Rs 9,480 crore in 2000-01, seemed to be on account of the use of IMPP for feedstock in determining concessions. It was unfair to use IMPP of various feedstock in determination of concessional rates, when naphtha import was not even permitted under the exim policy, they added.

In their submission to the government, FAI had brought out the distortions within the industry, that the scheme would lead to and it remained to be seen whether it would implement the ERC package after suitable modifications regarding methodology of determining concession rates. Since the ERC recommendation for seven per cent increase in maximum retail price of urea had not been implemented, it would continue to be sold at Rs 4,600 per tonne, they added. It appeared that the government would wait till the proposed review of Essential Commodities Act is completed, before taking a view on removal of distribution control on urea, though it was expected to be done in a phased manner by 2006. Steep increase in cost of domestic gas on account of removal of ceiling on basic price and linkage at 100 per cent of the international prices of fuel oil from April this year, would lead to an increase in subsidy requirements, they added.

The abolition of import duty and surcharge of 10 per cent would reduce the effective incidence on urea, and ammonia amongst others to 5.5 per cent from existing five per cent. This would reduce the incidence of duty on plant and machinery imports for new grassroot plants to 22.3 per cent from 21.8 per cent and 26.67 per cent from 27.27 per cent for revamping of existing plants.

Sources, however, welcomed the proposal to remove countervailing duty (CVD) on imported LNG, which will reduce the effective incidence of import duty to five per cent from the existing 21.8 per cent, saying it would help achieve cost competitiveness, as LNG was the feedstock of the future. But the levy of excise duty on fuel oil and for uses other than feed at 16 per cent, was an area of concern.

They also felt that the impact of removal of quantitative restrictions (OR) from next month on urea, had not been considered as the government had not acceded to the industry's demand for elimination of duty on imported raw materials and intermediates. The railway budget's proposal for a three per cent hike in freight would affect the dap fertilisers, though other fertilisers had been exempted from the hike. Since freight on coal and fuel oil was also up by two and one per cent respectively, cost of production and distribution, particularly of phosphatic fertilisers was expected to increase the impact on the fertiliser industry.

(PTI)