A group of ministers (GoM) led by finance minister Pranab Mukherjee on Friday recommended bringing urea, a commonly used fertiliser, under the nutrient-based policy, raise its price by 10% immediately and partially decontrol the commodity from the next fiscal. Even after the price decontrol, there will be some subsidy on the plant nutrient to cushion it from price volatility. The Cabinet Committee on Economic Affairs will take a final call on the matter shortly.
The government will simultaneously work on a notional price pooling mechanism of natural gas so that the cost of production for different urea plants stays the same to avoid the efficient gas-based producers from profiteering from the decontrol. Till the time it is achieved, the government will provide different subsidy amounts to different classes of producers based on their production costs, sources said.
FE had reported on June 9 that a panel of secretaries chaired by Planning Commission member Saumitra Chaudhuri has advised the government to immediately increase the price of urea by 10% and to totally decontrol the commodity’s price from 2012-13 financial year. Planning Commission and the department of expenditure in the finance ministry strongly backed the decision to reform urea pricing as the government wants to cut down food, oil and fertiliser subsidy to 1.5% of the GDP in the current fiscal. Subsidy on these three items had touched 40% of the government’s revenue receipts (3.9% of GDP) in the crisis year of 2008-09, but it has been brought down to 20% of revenue receipts last fiscal. Now the target is to further reduce it to 17% of revenue receipts this fiscal, for which an increase in the price to the farmer is essential. Finance ministry sources said that any slippage on this would seriously affect the future consolidation of government finances.
The Saumitra Chaudhuri panel had proposed that the government should introduce nutrient-based subsidy to urea as well. That is, inspite of the price decontrol, the government might still give some subsidy to cushion the farmers from a sudden and sharp price increase. For this, the subsidy outgo will be decided as per government’s paying capacity (instead of the commodity’s price and consumption, on which there is no state control). The entitlement per unit of urea contained in a fertiliser brand would be fixed accordingly. This gives the government absolute control over any assistance it wants to give to the farmers and consumers unlike the current system, where the total consumption of the fertiliser and the price determines the subsidy outgo. The panel has also recommended notional pooling of natural gas prices, under which, gas producers like ONGC and Reliance Industries will continue to get their contracted price, while the prices at which fertiliser companies get gas will be made uniform.