At a time when the economy is going great guns, the fertiliser sector?s fate hangs in balance. In fact, this crucial sector has not received any fresh investments for more than a decade.
To prop up investors’ confidence, the government is now drafting a new investment policy, reportedly based on the notion that tax sops attract new players.
“A crucial aspect of any new investment will be the gas price as the cost will be passed on to the government and will further jack up the subsidy burden. Since the life of a plant is 15-20 year, the crucial thing is long-term pricing system for gas”. Kribhco managing director BD Sinha said.
The policymakers’ are of the view that making producers’ price largely uniform may not necessarily enthuse potential investors, concerned about commercial viability of the fertiliser business. New investors such as Reliance Industries rest their hopes on decontrol or, at least, a rational pricing policy.
Another option being discussed is the introduction of a new pricing formula linked to import parity, against the existing cost-based pricing system, which puts a lot of onus on the industry to justify the price. The new pricing formula, however, needs tax concessions as there is a huge difference between the import price and domestic price at the moment. ?The present weighted average price of domestic urea units at the farmgate is cheaper than import price by around Rs 4000 a tonne. This will not pose a problem for the industry immediately. Allowing 90% of import price, exclusive of customs duty but inclusive of ocean freight and port handling charges is what recommended. This might not remain a very safe option for a long-term agreement for 10 to 15 years, given the volatility in global gas prices” said Sinha.
Industry experts, however, differ. They feel the investment will rather be attracted through a pricing policy that will appear potentially more remunerative for the manufacturers than a host of tax incentives that are, any way, more or less for new investors.
“As long as government controls the maximum retail price (MRP) of urea and sets limit for subsidy bill, it will have few options to attract fresh investments in this crucial sector whose robustness decisively impacts the country’s farm output and income” said an official of Fertiliser Association of India (FAI).
At best the, tax sops supplement the pricing policy to attract investors. Understanding the dynamics of gas pricing, given the international trends and growing globalisation of gas prices, the official say, a strict import-parity pricing will help every stakeholder more than tax sops
The fertiliser ministry is also considering introduction of reverse bidding process for new fertiliser plants in step with mega power plants. In a bid to rationalise fertiliser subsidy and introduce an element of certainty, the ministry plans to allow traders to bid if they can provide supply guarantee on agreed terms. Although this will appear a logical way to fix the government’s subsidy burden, it does not take into account the fact that the fertiliser units will not be equipped with long-term feedstock supply like mega power plants that have captive fuel.