For almost a decade we have seen the most amazing stop/go policies in fertiliser, and urea pricing, in particular. Since the average cost of a tonne of nitrogen produced in India is much lower than import prices, one would have thought it was not a very complicated problem to solve in a nation saturated with economist policymakers. But this was not to be. So, there is a great amount of clout of some groups to create a problem when solutions exist. Fortunately, it seems that a committee working under Planning Commission member Saumitra Chaudhuri has found a way forward, if press reports are to be believed. But keep your fingers crossed until the last mile is covered. I will give the main points of that solution and my interpretation of the logic behind them, though the distinguished planner should not be held responsible for that logic. As my teacher?the Nobel laureate Lawrence Klein?taught me, facts are few and theories are many, so more than one theory is compatible with the facts.

According to press reports, the proposals are that all gas-based units will get a flat subsidy, and there will be a uniform price at which gas will be supplied to them. The non gas-based urea units will be a second group and they will get two years to move over to gas, by 2014. This pricing formulation will give a very powerful incentive to reduce energy consumption per tonne of urea since it will give high financial incentives to those units that make efforts and reduce energy consumption per tonne of urea, the major component of the cost. It will also punish inefficient units. More important, since firm-level cost plus pricing is avoided, is that the framework of market reform is set firmly as the final objective. All this is known, the interesting question is why it was ignored in policymaking for around seven years.

The last expert analysis of the urea pricing policy was by the working group on urea policy that reported in 2005. Its preferred policy was to work with a single producer price, to provide for an energy pass through, and to significantly simplify movement and product control. To provide, once and for all, a capital subsidy of the kind indicated in the government?s SPV for economic infrastructure projects for existing fertiliser units to convert to gas-based feedstock, a committee under the chairmanship of the secretary (fertilisers), including representatives of the ministry of petroleum, department of expenditure and the fertiliser industry should be constituted to negotiate the prices of feedstock used by the fertiliser industry. These policies emerged from earlier recommendations made by Hanumantha Rao and me, arguing that in the supply price of fertiliser, the ideal option would have been to move over to the long range marginal cost or the long range average cost price of fertilisers for the economy. Simultaneously, there would be a package of once-and-for-all incentives for non gas-based units to move to the most efficient technologies available to the country.

In this working group report, there was also a SBS (second best strategy). In the SBS, there were two groups?a gas-based group and a FO/LSHS (furnace oil/low sulphur heavy stock) based group. There would be incentives for efficiency within each group and the so-called unintended gains would be much less. In this SBS, energy prices would be a by-pass subject to the upper limits set by a mandated committee under the secretary (fertilisers) with representatives from the concerned ministries and parastatals. For the transitional regime in the SBS formulation, the working group suggested once-and-for-all incentives of the kind designed in the SPV announced by the finance ministry for the public-private partnership in infrastructure. These incentives would be given to units switching from Naphtha/FO/LSHS and to units that had modernised in the last five years, and still had substantial debt servicing and interest payment obligations on account of investments made in line with recommendations by the government. It was noted that around 5 million tonnes of additional capacity was possible from de-bottlenecking, revamping and new and expansion projects, and it would get the long run average cost benefit. It took the government four years to implement this last policy and now it is coming out with the SBS and the energy bypass.

The working group had suggested that the energy policy should be one that works with the principle of sovereign control of these assets. This has consequences for regulation and pricing disciplines. These don?t seem to be explicitly talked about and would, in the interest of transparency, need explication since the working groups report has been published and is in the public domain. I had chaired that group and it had said that its proposals were ?self contained and ? they should not be tampered?. We hope the Chaudhuri proposals are self-contained and are not tampered with by sectional interests. It also proposed mildly raising the price of urea by, say, the increase in the weighted average price received of output of the agricultural sector. This has been implemented in the last two years. This was logically a precondition for a nutrient-based subsidy, which it should now be possible to move to. It also recommended that in districts where the cooperatives and joint sector of the fertiliser industry have strong roots with farmers? associations, grass-root village level cooperatives and well-worked out distribution systems, a subsidy directly aimed at the farmer could be attempted to be administered in consultation with the farmers? groups. Instead of five districts to begin with, the FM wanted the policy in 25 districts. That never saw the light of the day. Now it is aimed at the entire country, with no awareness that a UID is not a substitute for legal entitlements and that if you don?t have land rights you won?t get farm-based giveaways.

The author is a former Union minister