A panel of secretaries chaired by Planning Commission member Saumitra Chaudhuri has advised the government to immediately increase the price of urea by 10% and to totally decontrol the commodity?s price from the 2012-13 fiscal. Urea accounts for 60% of India?s fertiliser usage.
The panel?s recommendations, which are being considered by the ministry of chemicals and fertilisers, has strong backing from the finance ministry?s expenditure department and from the Planning Commission too, said a person privy to the development.
The finance ministry wants to free up the retail price of urea, the only fertiliser that now remains under state control, as it wants to cut down food, oil and fertiliser subsidy to 1.5% of the gross domestic product in the current fiscal, as per a disclosure made under the Fiscal Responsibility and Budget Management Act of 2003.
While the chemicals and fertilisers ministry is expected to circulate a Cabinet note on the proposal, the minister MK Alagiri is personally against it. But with finance minister Pranab Mukherjee supporting the changes, it is proving difficult for Alagiri to resist the plan. Alagiri is of the view that three-fourths of all the the farmers in the country are subsistence farmers and since they do not sell their produce in the market, they cannot recover an increase in the cost. The other two commonly used plant nutrients ? phosphatic and potash fertilisers ? were decontrolled from the beginning of 2010-11 against the wishes of Alagiri.
The production cost for urea varies from R12,000 to R33,000 per tonne, depending on which feedstock producers use. Those that run on naphtha, a liquid hydrocarbon, are less efficient, while those relying on gas are more competitive and have lesser subsidy requirement.
Subsidy on these three fertilisers had touched 40% of the government?s revenue receipts (3.9% of GDP) in the crisis year of 2008-09. For the current fiscal, the government has budgeted subsidy at about 10% of its total expenditure.
This will need an increase in the price at which the nutrients are sold to farmers. Finance ministry sources said that any slippage on this would seriously affect the future consolidation of government finances.
The Saumitra Chaudhuri panel has proposed that the government should introduce nutrient-based subsidy to urea as well. That is, in spite of the price decontrol, the government might still give some subsidy to cushion the farmers from a sudden and sharp price increase. For this, the subsidy outgo will be decided as per the government?s paying capacity (instead of the commodity?s price and consumption, on which there is no state control). The entitlement per unit of urea contained in a fertiliser brand would be fixed accordingly. This gives the government absolute control over any assistance it wants to give to farmers and consumers, unlike the current system, where the total consumption of the fertiliser and the price determines the subsidy outgo. The panel has also recommended notional pooling of natural gas prices, under which gas producers like ONGC and Reliance Industries will continue to get their contracted price, while the prices at which fertiliser companies get gas will be made uniform.
The issue of whether new fertiliser plants that would come up using imported LNG should be included in the proposed pooling system would be decided when the government finalises a new urea investment policy, said a person privy to the development. In this year?s budget, the government tried to encourage fresh capacity in this capital-intensive sector by allowing full deduction of capital expenditure made in the previous year while computing taxable income.