1. Verdict corner: Fix gas policy to fix urea subsidy

Verdict corner: Fix gas policy to fix urea subsidy

Domestic gas for urea is coming at the cost of competitiveness of other fertilisers

By: | Published: July 16, 2015 12:25 AM
gas price

Domestic gas for urea is coming at the cost of competitiveness of other fertilisers (Reuters)

The Delhi High Court order asking the government to disclose, by mid-August, its comprehensive policy for allocation of gas highlights the fact that the policy has been unable to address the industry woes. The HC has also directed the government to ensure implementation of the gas policy in uniform and transparent manner and without any discrimination.

Directing the government to resume the supply of gas to Deepak Fertilisers and Petrochemicals Corporation, the HC last week said that since the government had adopted a policy to suspend supply of gas to phosphatic and potash (P&K) fertiliser units, the decision should have been implemented uniformly for all such units like state-owned Gujarat State Fertilizer & Chemicals Limited and Rashtriya Chemicals and Fertilisers.

The issue is the difference in retail price between urea and other fertilisers. In the case of urea, MRPs are still fixed by the government and the difference between the cost of production and MRP is given out as subsidy to the producers. There is an incentive for the government to keep the cost of production low for urea manufacturers because it has little political space to increase the MRP of the most commonly used fertiliser. Even as the industry argues that the price of urea need to be hiked by at least 40% (the last major revision was in early 2010), the government is dilly-dallying on it. Domestic gas price is not market-determined and a proposal for revising the price as per a new formula is hanging fire.

For over a decade now, the MRP of urea has remained unchanged, except in 2010 when it was hiked by 10%. On the other hand, price of DAP/NPK (at R24,000-22,000/tonne) is much higher than urea. This has lead to excessive and indiscriminate use of urea. As a result, the current NPK use is imbalanced at 8.3:2.4:1 as against an ideal scenario of 4:2:2. Also, the price of urea is lower in India compared to neighbouring countries.

While the Nutrient Based Subsidy scheme (NBS) was introduced in 2010, wherein the prices of fertilisers except urea were de-controlled by the government, the petroleum ministry later decided to cancel natural gas allocation to the P&K fertiliser plants, as the subsidy under the NBS scheme was capped and providing cheaper input gas to complex fertiliser units was not reducing subsidy burden on the government.

However, the HC brushed aside the government’s view that the two government companies mentioned above were also producing urea in addition to P&K fertilisers. In a policy shift towards a regime where manufacturers don’t get inputs at regulated prices if their output prices are free, the ministry had ordered gas suppliers—

Reliance Industries and GAIL (India)—to stop supplies to Deepak Fertilisers’ plant in Raigad district in May last year and diverted the same to urea manufacturing units facing shortfall of natural gas, following which the company had moved the HC. The company argued that the classification between urea manufacturers and complex fertiliser manufacturers on the basis of grant of subsidy is irrational, arbitrary, and discriminatory. Besides, the suspension of supply of gas was due to the fault of department of fertilisers which did not frame the guidelines, it said. However, the government contended that the disconnection of natural gas and its diversion to NFL would result in reducing the subsidy burden by R700 crore on the government.

Endorsing Deepak Fertilisers’ view that the subsidy provided by the government is in effect subsidy to the farmers, it said that “reducing the price of urea at the cost of increase in the price of manufacture of complex fertiliser would effectively be contrary to the government’s policy of encouraging use of complex fertiliser.”

The ministry’s decision to suspend gas supply was based on an advice from the fertiliser ministry, which said since the company is free to hike the maximum retail prices (MRPs) of its products—nitrogen, phosphorous and potassium (NPK) fertilisers—unlike the manufacturers of controlled fertiliser urea, it can source costlier imported gas.

While Deepak Fertilisers was allocated 0.6 mmscmd of natural gas from oil fields of ONGC, Tapti Basin and Panna-Mukta and in October 2009, the empowered group of ministers had further allocated 0.178 mmscmd of natural gas to it from KG-D6 Basin.

India’s fertiliser manufacturing units are already using a reasonable quantity of liquefied natural gas (LNG) (about 9 mmscmd) of the total 42-43 mmscmd consumed by the sector. At present, all 11-12 mmscmd of gas produced from the RIL-operated KG-D6 field is supplied to fertiliser units.

Even major sponge iron producers including Essar Steel, Welspun Maxsteel and JSW Ispat Steel have taken the government to the Supreme Court over the petroleum and natural gas ministry’s directive to RIL to cut gas supplies from its KG-D6 fields to non-core users and direct the entire 50 mscmd of gas produced from the KG basin to priority sectors such as power, fertilisers, LPG and CNG. The directive was issued after a sharp drop in output at RIL Industries’ KG-D6 fields.

According to them, the 2008 guidelines of EGoM issued under the chairmanship of Pranab Mukerjee were clear that the priority to be afforded to ‘core’ sectors is only from the first 40 mmscmd of natural gas produced from the KG D6 fields and any output beyond this was to be utilised for fulfilling the allocation to gas-based sponge iron plants.

The gas pricing formula is already under challenge before the Supreme Court. RIL is contesting it in a PIL filed by CPI leader Gurudas Dasgupta and an NGO challenging the government’s gas pricing formula. Fertiliser subsidy for FY14 was R67,972 crore (revised estimate) and almost the same amount is budgeted for the current fiscal, although the actual demand could be much higher. The subsidy on urea (imported and indigenous) accounted for 57% of the total fertiliser subsidy last fiscal; this year, it is projected to be 63% as the subsidy on phosphorous and potash is set to shrink due to their partial decontrol.

Experts feel that it made sense for the government to stop domestic gas supplies to non-urea fertiliser firms as the policy of fixed subsidy was introduced for other two key fertilisers — phosphorous and potash— n 2010 and hence their MRPs are not fixed by it.

It seems P&K will never get domestic gas. Even the erstwhile fertiliser minister stated on the floor of the Parliament that NP/NPK production is not viable on imported RLNG. Thus, nearly 1.5 million tonnes of high quality NP/NPK fertilisers will never be available to the farmers.


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