The subsidy on distribution of domestically-produced urea will alone amount to Rs 8,939.70 crore. The urea subsidy component may go up even further if gold-plating by fertiliser companies is taken into account.

Subsidy on distribution of decontrolled fertilisers like DAP, MoP and various grades of SSP will amount to Rs 4,700 crore. The subsidy on imported urea is, however, likely to remain at a modest level of Rs 238 crore as very few quantity of it has been imported this year. With the increase in feedstock prices, the production of urea has already become costlier. The global prices of ammonia too have firmed up. This has caused the retention prices for various units to range between Rs 4,500 and over Rs 9,000 per tonne while the market price of urea is Rs 4,000 per tonne.

In the recent kharif season, the fertiliser companies supplied 115.39 lakh tonne of urea under ECA obligations and in the current rabi season they are scheduled to supply another 115.38 lakh tonne. The government, therefore, will have to render subsidy for sale of 230.77 lakh tonne of urea. Taking an average retention price at Rs 7,500 per tonne of urea, the subsidy element will work out to a conservative estimate of Rs 8,085 crore. But if `gold-plating' of capacities are resorted to, this estimate will go up even further.

The cost-plus retention pricing system awards higher efficiencies by providing larger incentives. The standard post-tax return of 1 per cent on net worth is provided on a capacity utilisation of 90 per cent. Efficiencies beyond this level are allowed a higher rate of return. Apart from this the fertiliser companies are paid freight subsidy for movement of fertiliser from factory to delivery points on basis of equated freight rates.