The new urea project at Talcher will worsen the already unsustainable fertiliser subsidy burden as retention price at this project may surpass the current high of $350/tonne
The Cabinet Committee on Economic Affairs (CCEA) has recently approved subsidy for urea to be produced by Talcher Fertilizers (TFL) —a joint venture of four PSUs: Coal India Limited (CIl), GAIL, Rashtriya Chemicals and Fertilizers (RCF), and Fertilizer Corporation of India (FCI). TFL is setting up the capacity of 1.27 million tonne per annum at Talcher, Odisha, at an estimated investment of Rs 13,277 crore. The project is based on coal gasification: use of coal to synthesise gas—a mixture of hydrogen and carbon monoxide—which is then processed to make urea.
The Centre controls the MRP of urea at a low level, one that is unrelated to the cost of production and distribution. Manufacturers get reimbursed for the shortfall in realisation from sales via the subsidy on a ‘unit-specific’ basis. There are over 30 urea plants, all based on gas. The subsidy to each plant is its retention price (RP) minus the MRP. The RP in turn, is calculated taking into account efficiency norms such as capacity utilisation, energy consumption, capital related charges (CRC), other fixed cost, delivered cost of gas and other inputs, etc.
Even as the current MRP is ridiculously low, at Rs 5,360 per tonne or $71 per tonne (at current exchange rate), the RP varies from a low of about $ 200 per tonne to a high of $350 per tonne. In the past, when plants were based on different feedstock such as naphtha, fuel oil/LSHS—and when even within the same feedstock category, there were differences in delivered cost—such wide variation was understandable. Now, when all plants are on gas, and gas price is uniform (under the policy introduced in 2015), this is inexplicable.
This has led to multiple maladies, such as protection of high-cost and inefficient plants, excessive use of urea, imbalance in fertiliser use, diversion of urea, and unsustainable increase in subsidy. Even as no credible effort has been made to address policy flaws, approval of a special price for urea to be produced by TFL (given the investment of close to $2 billion, its price will be substantially higher than even the existing highest of $350 per tonne) gives a clear signal that this will continue.
The special treatment is being justified on three grounds: (i) in India, coal is available in abundance, (ii) it will increase domestic supply of urea and reduce import, and (iii) reduce dependence on imported LNG. All three grounds are untenable.
As for (i), this fact is known for ages, as two coal-based plants were set up at Ramagundum (erstwhile AP) and Talcher in late 1970s/early 1980s. But, those were babies born sick. A revival plan for Talcher approved by the UPA regime in April 2007, and languished for six years. In September 2013, it was resurrected, and two joint ventures (JVs) were formed involving GAIL/CIL/RCF/FCI to implement it. That plan too languished. Now, the Modi government is at it.
As regards (ii), in the “Mann ki Baat” of November 26, 2017, Modi called for reducing urea use by 50% by 2022. In sync with this, the consumption of urea should decline from about 30 million tonne
in 2016-17 to 15 million tonne by 2021-22. This means, even with current domestic production of about 24 million ton, there would be a surplus of 9 million tonne. So, India won’t really need any increase in supply, be it from TFL or any new/revival project.
As for (iii), this too can’t be seen in isolation from ‘how we want to see the demand-supply unfolding’? If, the government is really serious about reducing urea use, it can afford a significant reduction even in the current domestic production and yet, fully meet the requirement. This will automatically reduce gas import.
The government pledges to correct policy flaws, yet maintains status quo. This is precisely what it has done while sanctioning urea plant at Talcher and granting it a special price under the subsidy scheme. This is driven by sheer populism, even as pending reforms such as urea decontrol, fertiliser DBT, etc, remain on paper, and may do so eternally.
The author is Delhi-based policy analyst