As the Union Cabinet once again prepares to consider raising urea prices by 10%, industry is demanding a 40% hike. After all, India?s urea prices at $96 per tonne are much lower than international prices of up to $600 per tonne
Why is the government unable to increase the price of urea?
Although committed to cutting subsidies, the government is unable to decontrol urea due to political opposition. The government had last revised the urea prices in 2010 and before that in 2002. Besides, there are practical difficulties in freeing up its retail price. Due to the use of different feedstock like naphtha and natural gas, there is a wide variation in the cost of production. Deregulating the commodity before producers using expensive naphtha switch to gas could tempt more efficient gas-based ones to resort to profiteering or predatory pricing. The scarcity in domestic natural gas has made it difficult to switch to gas. With the price differential between urea and non-urea fertilisers increasing substantially, it has become imperative for the government to raise urea prices. In a recent letter to the chemicals & fertilisers minister MK Alagiri, the finance minister P Chidambaram has pointed out the urgent need to increase urea prices. This is needed to cut fertiliser subsidies as well as to promote the balanced use of fertilisers. The Fertiliser Association of India (FAI) has pitched for at least a 40% increase in urea prices. The proposal for increasing urea prices was taken up by the Cabinet in June this year but it was withdrawn due to the lack of political consensus.
Why is there a steep difference between the prices of urea and non-urea fertilisers in India?
The government decontrolled prices of non-urea fertilisers in 2010 by introducing the nutrient-based subsidy (NBS) but urea prices have been kept under price control. As a result, while urea is currently priced at R5,340 a tonne, non-urea complexes like DAP (Diammonium Phosphate) and NPK (Nitrogen, Phosphate, Potash) are ruling at R24,000 and R22,000 a tonne each, leading to excessive use of urea and even smuggling of this fertiliser to other South Asian countries. At $96 per tonne, India has the lowest urea prices among many countries. Urea is sold at $266 per tonne in Pakistan and $295 in China while its retail price in the US is $526. International prices are currently in the range of $500-600 per tonne. Urea prices were increased by 10% in 2010 in India. Introduction of NBS for P&K fertilisers deregulated prices of these complexes while the subsidy component for them was fixed on a per kg of nutrient basis. Prices of DAP have gone by 150% while those of Muriate of Potash (MoP) have risen has by 280% since the introduction of the NBS regime. But urea prices have remained constant as the government stepped up subsidy on this fertiliser.
What are the side-effects of this price differential?
Subsidised urea has led to farmers excessively using this nutrient, resulting in an imbalanced fertiliser mix, with low usage of non-urea?P&K?complexes. Wide disparity between prices of urea and non-urea fertilisers?largely a result of the lopsided subsidy regime?has adversely affected the fertiliser use mix in the country. The gauge of balanced fertilisation?the NPK ratio?has skewed towards excessive use of N and disproportionately lower use of the other nutrients P&K. NPK use ratio widened from 4.7:2.3:1 in 2010-11 to 6.5:2.9:1 in 2011-12 due to the steep fall in P&K consumption. Total nutrient consumption per hectare of gross cropped area declined from 146.3 kg in 2010-11 to 143.8 kg in 2011-12. Urea, which adds N to the soil, currently accounts for about 50% of the total fertiliser consumption in the country.
Industry players believe there is an urgent need to increase urea prices and to bring them under the NBS regime. Imbalanced usage of fertilisers would affect the food output going ahead, while immediately hitting soil fertility.
Will direct transfer of subsidy to farmers help?
The finance minister has also asked the fertiliser ministry to prepare a concept note on direct transfer of subsidy to cultivators. Industry players such as Iffco have welcomed this move, which is being seen as beneficial to farmers. Direct transfer would help in stopping smuggling of subsidised urea to South Asian countries. Nearly 15-20% of urea sold in the country is being smuggled due to the massive price difference, according to FAI. Fertiliser smuggling across India?s porous borders, especially with Nepal and Bangladesh, has become the latest menace that threatens to upstage narcotics and cash from their prime position at the top of the list. The most serious implication of this is the impact on the government?s annual subsidy bill that has ballooned to almost 10% of its total expenditure.
Will higher urea prices help in cutting the fertiliser subsidy bill?
A 10% hike in urea prices would help in cutting government subsidy by roughly R2,000 crore. However, many believe that a total decontrol of the fertiliser sector would make it unaffordable for the farmers to use nutrients in farming activities due to exorbitant prices. In the Union Budget 2012-13, the government pegged the fertiliser subsidy at R60,974 crore, as against R67,199 crore in 2011-12. Under the fertiliser subsidy, the government would provide R13,398 crore for imported urea, R19,000 crore for indigenous (urea) fertilisers, and R28,576 crore for the sale of decontrolled fertilisers (DAP, MOP and complexes) at a subsidised rate to farmers.
Why are there no fresh investments into the sector?
There has been no significant investment in urea capacity in a decade in India, thanks to lack of free market pricing. The much-touted new investment policy for urea? which is expected to take into account both brownfield and greenfield projects?has not been notified so far. The new policy aims to add about 7-8 million tonnes of fresh production capacity to the country?s existing capacity of 22 million tonnes, which would help in meeting the annual demand of 30 million tonnes. This would require an investment of R45,000 crore over the years in the sector.
India now produces 22 million tonnes of urea from 28 units, two-thirds of which use natural gas as feedstock. The demand for this mass-use plant nutrient is expected to go up to 33.7 million tonnes in five years from 30.5 million tonnes now. The new investment policy has been mooted to address the grim situation where no new investor have come in to this business for a long time as gas is scarce. The proposed policy would allow eligible investors to tap LNG from global markets. The cost of gas would be passed through to the operational cost, which is recovered from the subsidy entitlement. The gap between the cost of production and the state-set retail price would go to the producer as subsidy. To boost investments into the fertiliser sector, full deduction of capital expenditure from the taxable profits of new fertiliser units was allowed last year.
