In what signals a policy shift towards a regime where manufacturers don’t get inputs at regulated prices if their output prices are free, the petroleum ministry has ordered that supply of domestic gas to Deepak Fertilisers and Petrochemicals Corporation be stopped with immediate effect.

The ministry’s decision, sources said, 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.

Incidentally, Deepak Fertilisers is currently battling it out with the Kolkata-based Zuari Group and Vijay Mallya’s UB Group for a controlling stake in Mangalore Chemicals and Fertilizers.

The stoppage of domestic gas supplies to Deepak Fertilisers could set a precedent. In the case of other companies where the output price is not controlled could see a similar dispensation soon.

It makes 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 ? in 2010 and hence their MRPs are not fixed by it.

In the case of urea, the 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 the issue.

Also, domestic gas price is hardly market-determined and a proposal for revising the price as per a new formula is hanging fire.

Fertiliser subsidy for 2013-14 was Rs 67,972 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.

As for new power plants including ultra mega power projects, pass-through of fuel costs is becoming the norm. Power plants come only after the fertiliser industry on the priority list when it comes to getting gas linkages.

The petroleum ministry in its May 13 order said that as an interim measure, the gas (so far allocated to Deepak Fertilisers) be distributed to other urea manufacturing units that have shortfalls in supply of domestic gas, in proportion to their needs.

Swapping, if required, under the guidelines issued by the ministry, may be explored to implement this decision, the ministry added.

Currently, Deepak Fertilisers is being supplied 0.6-0.7 million metric standard cubic metres per day (mmscmd) of natural gas produced domestically.

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 12-13 mmscmd of gas produced from the Reliance Industries-operated KG-D6 field is supplied to fertiliser units.

The fertiliser ministry told the oil ministry on May 1 told that the MRP for NPK fertilisers under the nutrient-based subsidy (NBS) scheme is free and the manufacturers of NPK fertilisers can absorb the high cost of ammonia in the MRP, adding that Deepak Fertiliser’s share of gas may be shifted to urea manufacturing units, ?preferably to National Fertilizers?.

Deepak Fertilisers reported a net profit of Rs 88.17 crore on income from operations of Rs 1,732.65 crore in H1FY14. Its stock closed 5.12% higher at Rs 135.55 on the BSE on Wednesday.