Gas price hike could hit fert subsidy plan

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SummaryThe C Rangarajan committee’s proposal to nearly double the domestic price of natural gas, if implemented, could adversely affect the government’s subsidy reduction plan and make the new urea investment policy “redundant”, is the thinking at the ministry of chemicals and fertilisers.

The C Rangarajan committee’s proposal to nearly double the domestic price of natural gas, if implemented, could adversely affect the government’s subsidy reduction plan and make the new urea investment policy “redundant”, is the thinking at the ministry of chemicals and fertilisers. The administrative ministry for the fertiliser industry, whose output is sold at heavily subsidised prices and through whom the subsidy is currently routed, has written to the finance ministry to assess the budget implications of the panel’s proposal before taking a call on it.

If the Rangarajan committee’s views are accepted, the gas price would be around $8 per mmBtu (exclusive of transportation charges and marketing margins), compared with $4.20 at present. Sources said that the fertiliser ministry has contended that such a price won’t be viable for the fertiliser industry, which needs to add capacities to keep pace with the rising demand for fertilisers.

Basically, the fertiliser ministry wants the finance ministry to give clarity over the subsidy structure before the gas price is revised. It has estimated that a $4 per unit increase in price of gas would push up the cost of urea by R5,200 per tonne, and the annual fertiliser subsidy bill by around R10,000 crore at current (subsidised) retail prices for urea. Gas accounts for over three-fourths of the cost of production of fertilisers. A proposal to decontrol retail prices of urea has been hanging fire for long due to political sensitivities while there have been protests over the spike in prices of the two other fertiliser classes (phosphatic and potassic) that were decontrolled in April 2010.

The proposed new urea investment policy aims at facilitating investments to the tune of R35,000 crore in fresh urea capacities.

The proposed new urea investment policy aims to reduce the country’s dependence on imported urea, which is far costlier (the current import price of urea is around $ 380 per tonne). According to the fertiliser ministry, if the price of gas is hiked as recommended by the Rangarajan panel, the differential between costs of imported and domestic urea would come down, making the new policy superfluous.

At present urea is sold at an administered price of Rs 5,310 per tonne, while remunerative price for the companies would be more than double this. The widening differential between the remunerative price for the industry and the MRP along with the high cost of imported urea (imports account for a

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