Fiscal incentives, including concessions in excise duty, customs duty and income tax holiday, will be the key components of the forthcoming investment policy for the fertiliser sector. The fertiliser ministry is also considering the introduction of the reverse bidding process for the new fertiliser plants on the lines of mega power plants.
The fertiliser price under the proposed policy will be benchmarked with international price. But the price may be 5% less than international price, a senior official in the department of fertilisers (DoF) told FE.
Under the new investment regime, domestic companies will be allowed to participate in global tenders if they can provide supply guarantee on agreed terms, the official said. This would rationalise the fertiliser subsidy and introduce an element of certainty.
Confirming the move, chemicals and fertilisers minister Ram Vilas Paswan said, ?This is being done to prop up an investors? confidence as there has been no fresh investment in the sector for over a decade.?
However, industry experts differ. Investment would be attracted through a more remunerative pricing policy rather than a slew of tax incentives that more or less already exist. ?As long as the government controls the maximum retail price of urea and set limit for the subsidy bill, it will have little chance of attracting fresh investments in this crucial sector whose robustness would decisively impact the country?s farm output,? a Fertiliser Association of India official said.
?A key policy issue of priority clearance for de-bottlenecking proposal is pending for over a year,? Iffco managing director US Awasthi said. The government policy doesn?t show any urgency on restricting imports, he added. ?A drastic policy orientation is needed. Presently, we have the highest urea stocks in the country. Yet, the government is thinking of importing 5 million tonne of fertiliser this fiscal. Traders start cornering more fertilisers from the global market the moment there are indications of high shortages and import plans in India. This impacts domestic industry as well as the agriculture sector and food output,? Awasthi said.
At least an additional two million tonne of fertiliser can be produced domestically solely through de-bottlenecking and help reduce the import bill. Over the last three years, Iffco has added 5.25 lakh tonnes of production capacity by de-bottlenecking, at only 25% of the capital cost required to set up a new plant. But the industry feels there is little respect for its cost saving and energy efficiency effort in policy-making.
The huge subsidy bill pegged at Rs 95,000 crore, thanks to the costly imports, has stopped giving satisfactory returns in terms of agricultural productivity. This cannot carry on. Rock phosphate sold at $60 per tonne now costs $250 a tonne.
In this context, the new fertiliser policy needs to give an explicit assurance regarding the return on capital to make the projects bankable. The assurance could be contingent on optimising the capital cost. ?As long as the government controls the final price to the farmers, fresh investments in the sector would remain a pipe-dream,? stresses Awasthi.
Kribhco managing director BD Sinha said, ?Understanding the dynamics of the gas economy given the international trends and growing internationalisation of gas prices will be a crucial aspect of any new investment. The government has admitted that if the delivered price of gas is above $5 per million British thermal unit, the viability of fertilisers firms may be affected adversely.?
The industry expects this price to go up to $6 or more, which will further raise the subsidy burden. ?Since the life of a plant is 15-20 years, the crucial thing is long-term pricing system for gas,? said the Kribhco MD.
One of the option under policymakers? consideration is to make producers? price largely uniform. This might not necessarily enthuse potential investors who are concerned about the commercial viability of the fertiliser business. The new investors such as Reliance Industries, which plans to set up two fertiliser plants, are pinning their hopes on decontrol or at least, a more rational pricing policy.
The option of a new pricing formula linked to import parity being discussed to replace the existing cost-based pricing which places a lot of onus on the industry to justify the price. However, that needs tax concessions, as there is a huge difference between the import price and domestic price at the moment. Currently, the weighted average price of domestic urea units at the farm-gate is cheaper than import price by around Rs 6,000 a tonne.
The industry is quite jittery over this. What is being recommended is to allow 95% of import price, exclusive of customs duty but inclusive of ocean freight and port handling charges.
?This might not remain a very safe option for a long-term agreement, say 10 to 15 years (the usual tenure of purchase contract which government enters into with new urea units) given the volatility in global gas prices? said Sinha.