Fert sector looks to break stranglehold

Written by Rakesh Sood | New Delhi, Aug 28 | Updated: Aug 30 2008, 05:08am hrs
The incapacitated fertiliser industry in the country has had enough. With input costs escalating and finished product prices remaining stagnant and subsidy arrears for the last 10 years going on mounting, the exasperated industry has asked the government to unshackle it from the over-regulated environment they operate in.

We have written to the government to find a suitable mechanism to provide fertilisers to farmers directly and thus free the industry. This would enable the industry to grow like any other industry, without day-to-day interference from the government, Fertiliser Association of India (FAI) director general Satish Chander told FE .

There is inordinate delay in recovering a major portion of delivered costs, that is subsidy. This seriously affects the cash flow of companies, significantly increasing their working capital requirement. Ironically, the government neither recognises the additional requirement of funds due to delayed disbursement of subsidy while approving the costs, nor does it reimburse the cost of additional working capital, Chander said.

While hydrocarbon prices, a key input for manufacture of fertilisers, has increased by about 40% during the last one year, subsidy arrears have gone up from Rs 9,662 crore in 2007-08 to Rs 89,000 crore this fiscal. The maximum retail price (MRP) for fertilisers remains unchanged since 2002.

To add to the woes of fertiliser players, the Centre has made a Budgetary provision of only Rs 30,986 crore this year, towards fertiliser subsidy, against the requirement of Rs 1,19,772 crore. A steep rise in costs, coupled with a stagnant MRP, has contributed to a substantial increase in the portion of subsidy. How can any industry sustain when fertiliser companies have to depend on the Centre to recover the balance 80% of delivered costs for a long period quipped Chander.

The word subsidy in the context of the fertiliser industry is actually a misnomer. If subsidy is considered as an investment to improve farm yields, it is a good concept, but then it should be looked at from that angle, the FAIs top official added.

With huge arrears in the hands of government, it is not giving us subsidy, we are subsidising the government by routing supplies through us. This is a major reason that no new investment has come in this sector during the last 10 yearsmaking us increasingly reliant on costly imports, Chander added.

The country was self sufficient in urea in 2001-01. Urea imports this year are expected to go up to 6.93 million tonne. DAP imports are expected at 2.29 million tonne. Ironically, the government is paying far higher subsidy on imported fertilisers than their domestic counterparts, eating away an increasingly large portion of available funds.

The delivered cost of imported urea is Rs 31,000 per tonne, against the indigenously produced urea worth Rs 13,000 a ton. If gas is made available to the domestic urea industry, the average cost will come down to Rs 8,600 per tonne, slashing Rs 44,000 crore off the governments subsidy bill.

The available gas supply is 28.20 mmscmd, against the requirement of 42.45 mmscms. The industry faces a shortfall of about 33.56 mmscmd. Here again, the government gives special treatment to foreign suppliers, to whom the payments are made in cash. The price differential between indigenous and imported urea, is currently saving a subsidy of Rs 36,000 crore annually, in the absence of domestic production.

This is a major reason why there has been no new investment in the sector during the last 10 years. Any investment is a good investment, so long as it gives returns. But here, the facts point to the contrary. The fertiliser subsidy is increasing year after year, but is not giving commensurate returns in terms of increase in farm output, Chander said.

The burden of a burgeoning subsidy of about Rs 1,20,000 crore annually (0.8 % of GDP) can not be sustained in a free and market driven economy, the FAI official said.

A lack of political will to declare a long-term sustainable fertiliser policy is responsible for the lack of fresh investments in the sector, during the last 10 years in the country.

If the current subsidy system persists, the maximum retail price for fertilisers needs to be raised by 42%.

Last year, the government decided to issue bonds worth Rs 7,500 crore to fertiliser manufacturers, to partly offset the outstanding subsidy dues. This is not a permanent measure and shows that the government is still not serious towards the problem. The government must come out with a policy which is industry-friendly and ensures timely payments to producers.

Another important aspect is irrational and imbalanced use of fertilisers. During the 1960s, the response ratio of fertilisers, in terms of production of foodgrain, used to be around 19 kilograms of foodgrain for each kilogram of fertiliser used. This has now come down to a mere 12 kilos of foodgrain per

kilo of fertiliser.

Today, farmers are applying only hose fertilisers that are being subsidised by the government without giving serious thought that our soil need micro-nutrients and secondary nutrients along with nitrogen, phosphate and potash to achieve better results. The government should shift to a nutrient-based subsidy instead of the present product-based subsidy. This would help replenish the required micronutrients and secondary nutrients that have been depleting persistently.