‘Make in India’ skips fertilizers

Even as Modi – government has unleashed a wave of reforms to accelerate the pace of foreign direct investment [FDI] and give a boost to prime minister’s flagship “Make in India”, fertilizers happens to be one sector that has been completely bypassed.

While, indigenous production in all segments of this crucial industry continues to languish, the most neglected is DAP [di-ammonium phosphate; it contains 18% nitrogen [N] and 46% phosphate [P]] where traders have hey-day at the expense of domestic industry. Of the total DAP consumption in India, nearly 60% is met from imports. India is the single biggest buyer of DAP in global market with a share of more than 50 per cent of globally-traded DAP.

Even for domestically-manufactured DAP, nearly 90 per cent of the requirement of phosphoric acid [raw material in its manufacture] is imported. The other raw material used in manufacture of DAP is ammonia, a source of nitrogen [N] supply. The bulk of its requirement is imported even as some manufacturers make their own ammonia, feedstock for which is natural gas.

The global suppliers of DAP viz., USA, Morocco, China, Russia etc operate as a cartel orchestrating their moves to set prices at the desired level. They also happen to be suppliers of phosphoric acid and manipulate its price in a manner that the cost of manufacturing DAP in India works out to be higher than imported DAP.

In the initial stages, the then government took due care to offset the resultant handicap of domestic industry. During 1979-1991, it controlled the maximum retail price [MRP] of DAP at a low level and compensated all manufacturers for the excess of their unit-specific production cost over it as subsidy under the retention price scheme [RPS]. Imported DAP too was subsidized on actual basis.

The government also took a conscious decision to exempt all fertilizers including DAP from levy of customs duty [CD] as well as excise duty [ED]. The imports of rock phosphate and sulphur [used for making phosphoric acid] and ammoina were also exempt from levy of CD. However, import of phosphoric acid attracted CD at an effective rate of 13%. These steps were meant to keep subsidy payments low.

Under the RPS dispensation, since, all suppliers were compensated at their respective cost via the subsidy mechanism, the industry had a reasonable opportunity to grow. This was reflected in a significant increase in domestic capacity and production and hence, less dependence on import during the decade of 80s.

On August 25, 1992, all P&K fertilizers [including DAP] were decontrolled and with this RPS and subsidy scheme was dismantled. However, due to steep increase in MRP and resultant backlash from farmers, subsidy was re-introduced as ‘ad-hoc concession’ from October 1, 1992. For a brief period of 6 months, concession was given at same rate for both domestic and imported DAP.

W.e.f April, 1993, concession on imported DAP was withdrawn. That dispensation continued for more than 3 years. From July, 1996, however, concession on imported DAP was revived but kept at a lower rate than concession on domestic DAP. A differential of Rs 1000-1500 per ton was maintained to give required protection to domestic industry.

The policy of differential concession was continued till March 2010. From April, 2010, with the introduction of nutrient based scheme [NBS], this was given a good-bye. Under NBS, subsidy on DAP is uniform irrespective of the source of supply even as suppliers have freedom to fix MRP.

On the duty front, post-decontrol, even as exemption on rock phosphate, sulphur and ammonia continued, CD on phosphoric acid import was eliminated in September, 1992. However, in the budget for 1999-2000, duty on all raw materials and intermediates was revived @5%. Imported DAP [besides all other finished fertilizers] too attracted duty @5%. The position continues till date.

Thus, at present, the government treats domestically manufactured DAP and imported DAP at par in regard to both concession/subsidy and levy of import duty [this is despite India lacking natural resources and the cartel of global suppliers inflicting an interminable cost disadvantage on domestic producers]. Having protected the industry in the past, it has now abdicated its responsibility.

The domestic industry is fighting a battle for its survival. The un-viability of its operations has forced several manufacturers to turn in to importers to keep their head above water. There could not be a better example of “Make in India” being sacrificed at the altar of flawed policies. The Fertilizer Association of India [FAI] has rightly petitioned the government seeking corrective action.

A logical course would have been to increase CD on DAP from present 5% to at least 10% or even higher. But, that is not feasible as under WTO [World Trade Organization], India is committed to a bound rate of 5% [implying that the applied rate cannot exceed this level]. However, the least government can do is to remove CD on phosphoric acid, ammonia, rock phosphate and sulphur even while retaining duty on DAP @5%.

As this will still be far from fully removing the handicap of domestic manufacturers, in the medium-term, the government should aim at getting the bound rate hiked to 25-30%. For this, the process under the relevant article of WTO agreement should be initiated right away. In the past, government made similar attempts [for instance, in case of rice] with successful outcome. That will give required leeway to give protection in future.

For the long-term, the government should encourage acquisition of stakes in rock phosphate and sulphur mines in countries richly endowed with these materials [just as it is currently making efforts to pick up shares in gas fields in countries endowed with abundant reserves]. This will help in ensuring supply of these raw materials at competitive prices in turn, enabling domestic manufacture of DAP at lower cost.

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