Clearly, viability of these investments is predicated on subsidy support. But the government wants to rein in subsidy. Remember the FMs commitment in Budget 2012 to maintain subsidies (food, oil and fertilisers) within 2.5 per cent in the current year and bring them down to 1.75 per cent in three years?)
The urea investment policy (UIP) recently approved by the Cabinet based on EGoM recommendations assures investors in a ‘Greenfield’ project prices linked to the import-parity price, or IMPP, with a range of $305-335 per tonne corresponding to gas price $6.50 per mmBtu. So, for each $1 increase in gas price beyond $6.50 per mmBtu, compensation to the manufacturer increases by $20 per tonne. Thus, for a gas price of $14 per mmBtu, the manufacturer would get $485 per tonne on the higher end of the range.
Based on such tempting numbers, firms have reportedly drawn up plans for setting up urea capacity totalling around 20 million tonnes 12 million tonnes more than the current deficit of eight million tonnes. If all proposed projects materialise, India will be staring at a huge urea surplus 4-5 years from now. This sounds bizarre. Neither policy initiatives nor the response of firms are in tune with ground realities. The government controls MRP of urea, which is currently Rs 5,310 per tonne. Under new price scheme (NPS), it compensates producers for excess of cost over this as subsidy. That will apply to urea from new units as well.
At $14 per mmBtu, the gas cost alone will be Rs 18,480 per tonne (24 mmBtu for a tonne of urea, and $1 = Rs 55). Assurance of $485 per tonne will translate to a farmgate cost of close to Rs 30,000 per tonne. So, the government will pay a subsidy of around Rs 25,000 per tonne nearly five times the price paid by farmers. Even imported urea from Oman India Fertiliser Co (OIFC) a JV between Iffco/Kribhco and Oman Oil Co (OOC) at a landed cost of $215 per tonne, perhaps the cheapest source of supply, means a subsidy of Rs 10,000 per tonne!
Clearly, viability of these investments is predicated on subsidy support. But the government wants to rein in subsidy. Remember the FM’s commitment in Budget 2012 to maintain subsidies (food, oil and fertilisers) within 2.5 per cent in the current year and bring them down to 1.75 per cent in three years?
So, it axes fertiliser subsidy payments by reducing entitlement, underprovision, delayed payments, etc. This year, the Budget allocation of Rs 50,000 crore is already exhausted. Industry has not received payments for many months! Subsidy payments to new plants under UIP could reach a huge Rs 50,000 crore. Inability to pay, albeit due to fiscal compulsions, would force a retreat or reneging on commitments.
In past, we have even seen ‘retrospective’ changes in policy parameters (seventh and eighth pricing periods 1997-98 to 1999-2000 and 2000-01 to 2002-03 under RPS). Industry has faced an uncertainty policy environment for more than 15 years when there was virtually no addition to capacity. This has led to heavy dependence on imports.
The latter account for 39 per cent of total annual fertiliser material consumption of 59 million tonnes and 45 per cent in terms of NPK nutrients. In 2011-12, India imported around $11.5-billion worth of finished fertilisers and another $5 billion as raw materials and intermediates. That adds up to Rs 90,000 crore. Prices of these materials are subject to vicissitudes of global demandsupply forces.
The market is cartelised by a few suppliers and producers who often dictate prices. They cut production to maintain prices at artificially-high rates. Setting up JVs in countries where raw materials are abundant and cheap; or buying assets or mines abroad can help counter them.
The Fertiliser Association of India (FAI) has even floated idea of creating a ‘Sovereign Fund’ with a minimum size of over $1 billion to support such efforts. Besides ensuring uninterrupted supplies, these help in procuring materials at lower prices. For instance, in 2011-12, India imported urea from OIFC at a landed cost of $215 per tonne against an average of $482 per tonne paid for import from other sources. But we need to address a still bigger issue. That has to do with ‘viability of investment in the fertiliser industry in India’.
If this isn’t addressed, we may risk turning even overseas investments unviable. The compulsion to rein subsidy and political expediency of keeping MRP artificially low has been the root cause of policy paralysis in fertilisers for ages. Rising input or fuel cost has added fuel to the fire. Imagine, if $14 per mmBtu the price demanded by RIL for its KG gas goes through, fertiliser subsidy payments to existing urea plants will zoom by over Rs 20,000 crore per annum.
It would aggravate trade-offs. This vicious circle has to be broken if we want stability of policy, fundamental to attracting investment and growth. That won’t happen as long as the current dispensation of fertiliser subsidy continues. The announcement of direct cash transfer (DCT) generated some hope. But that was shortlived. Even before the ink was dry, the government decided that fertiliser will be excluded from the scheme.
So, the fertiliser quagmire continues.
Published at http://articles.economictimes.indiatimes.com/2013-01-14/news/36331641_1_urea-npk-tonne