Under the new urea policy 2015, the government reimburses the fixed cost incurred by domestic urea units for manufacturing more than their reassessed capacity (RAC), which is the best monthly average production capacity of a unit.
India’s urea output is likely to dip marginally to 24.3 million tonnes in 2016-17 as domestic production has become unviable due to lower global prices. Urea output had reached a record 24.5 million tonnes in 2015-16. “Urea production may be less by 2,00,000 tonnes in 2016-17. Import parity price (IPP) has come down, making domestic production less competitive,” a senior Fertiliser Ministry official told PTI.
Under the new urea policy 2015, the government reimburses the fixed cost incurred by domestic urea units for manufacturing more than their reassessed capacity (RAC), which is the best monthly average production capacity of a unit. But this incentive is linked to IPP. Since IPP has been coming down in recent months, urea units were not keen to manufacture additional quantity as it was unviable with reduced incentive from the government.
However, the government had last week brought amendments to the urea policy to enable manufacturers produce additional quantity of the key soil nutrient. As per the amendment, the government has raised the ceiling imposed on production beyond RAC during the year 2016-17.
“Increase in the IPP-linked cap on urea production beyond the RAC is a positive step by the government to promote the indigenous production of urea,” rating agency ICRA’s Senior Vice-President and Group Head K Ravichandran said. In recent months, low international urea prices had made production beyond the RAC unviable for some units under the existing cap of IPP plus incidental charges.
“However, with the increase in cap by an additional USD 15 per tonne towards incidental charges, there will be additional headroom to compete against imported urea for the above units,” he said in a statement. With this amendment, the domestic urea production in 2017-18 is expected to be higher. There are about 35 urea manufacturing units in the country. Due to gap in supply- demand, the country imports up to 8 million tonnes of urea annually.