Rising fertiliser prices may hit urea decontrol

Written by Nistula Hebbar | Nistula Hebbar | Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Oct 18 2011, 07:58am hrs
This is one reform measure that is coming back to haunt the UPA government. Since potash and phosphatic fertilisers were decontrolled at the beginning of last fiscal, their prices have skyrocketed, raising concerns in the Planning Commission over the likely impact of higher input costs on farm GDP and food inflation. The Commission has conveyed its concerns to the Prime Ministers Office, prompting second thoughts among policymakers on the timing of decontrol of urea, the most commonly used fertiliser.

While prices of phosphatic and potassic (P&K) fertilisers went up substantially in 2010-11 itself, they have surged further in the current fiscal. According to market observers, the price of diammonium phosphate (DAP) increased up to 80% to R18,000 a tonne from April to October and mureate of potash (MoP) more than 50% to R7,000 from a year ago.

Of course, imported inputs for these fertilisers have turned costlier too, but at rates much slower than the spike in retail prices.

Prices of potash and rock phosphate are determined by global contracts, and India being a major importer, decisively impacts prices. While potash was imported at $370 a tonne last year, the contracted price for this year has gone up to $470 and $520 for next fiscal year.

According to government sources, decontrol of P&K fertillisers which depend almost entirely on imported inputs came after a 'gentlemen's agreement' between the government and fertiliser manufacturers that prices won't rise beyond 10% a year. But that was not to be.

What's more, apart from the raw material price rise in the international market, we have found that private companies had not booked railway rakes to transport fertilisers from August and created an artificial scarcity in the market, said a top official familiar with the issue. The official added that fertiliser companies have also been bundling products like concentrates along with fertilisers, leaving farmers with no option but to buy products that are not essential for their crops.

While economists in the government are convinced about the utility of decontrolling fertiliser prices, the political class has always been averse to cutting fertiliser subsidies. The experience with P&K decontrol has emboldened the latter. Chemicals and fertilisers minister MK Alagiri and minister of state Srikant Jena have stridently opposed the proposal to decontrol urea. Every MP and MLA especially from east India, where monsoons were good and demand for fertllisers is high has camped at the (chemicals and fertilisers) ministry, demanding some relief, said an official. Alagiri has written to Prime Minister Manmohan Singh that bringing P and K under the nutrient-based policy from April 2010 has only led to higher farm prices, instead of achieving the desired result of helping farmers either in terms of price reduction or in a wider choice of fertilisers.

However, analysts do not appreciate the argument against urea decontrol. Says Tarun Surana, equity research analyst at Sunidhi Securities and Finance: Since import dependence on urea is limited, the experience with decontrol of import-intensive P and K should not prompt the government to postpone urea decontrol. Besides, unlike in the case of P and K, the input (gas) cost for urea is fixed.

While a Group of Ministers headed Pranab Mukherjee had cleared a road map for urea decontrol and a revised subsidy pattern for existing units which produce urea on August 5, it is still to be cleared by the Cabinet Committee on Economic Affairs (CCEA). Work on a new subsidy structure for new ventures in fertilliser production has been a non-starter, said the source.

Fertiliser companies, however, refuse to shoulder the blame for the price rise and deny that they had a hand in creating the scarcity. They say they had to deal with the sharply increasing cost of labour, interest costs and currency hedging costs on account of a depreciating rupee in recent months. Fertiliser subsidy on imported products P&K are calculated at an exchange rate of Rs 45.60 a dollar now, although the domestic currency has weakened by more than 10% this fiscal, said a senior fertiliser industry executive.

Iffco MD US Awasthi told FE that the fertiliser major is not guilty of any of the charges of bundling of products or not delivering the commodity at the consumption point. Despite higher costs, we have delivered fertilisers at the farmers doorstep. Farmers are on our board of directors and we have not received any complaint from any one, he said.

The PMO, which called for a meeting on the revised subsidy pattern for urea was informed of these developments by those involved in framing the policy. The matter now rests there, said an official.

Pertinently, the nutrient-based regime for P and K also is not devoid of subsidy elements. The difference between the controlled regime for urea and the other two fertilisers is that, in case of the latter, the subsidy is now fixed.