Removing the archaic ceiling on urea prices, which is a political sop to secure votebanks, will energise domestic production. This, in turn, will ensure consistent supply and also lessen the public’s subsidy burden
India was able to import only about 9,00,000 tonnes of urea between April and November, 2014, which was 16 per cent less than what was imported during the same period in 2013. This put tremendous pressure on local markets. The problem was aggravated by a drop in supply from the Oman India Fertiliser Company SAOG.
At home, three naphtha-fed urea production plants viz, Madras Fertilisers Limited, Mangalore Chemicals and Fertilisers, and Southern Petrochemicals Industries Corporation, also had to stop production after the Government decided to suspend subsidy payments.
They have since re-started production but an imbalance in the demand-supply equation was nonetheless created in the run-up to the Rabi season which extends from mid-October to mid-March.
The shortage in supply also resulted in the proliferation of a black market for urea, especially across the northern and eastern parts of India. Urea selling at over 30 per cent the ‘controlled’ maximum retail price which has been pegged at Rs5,360 per tonne.
To curb black marketing, the Union Government released a record 3.7 million tonnes of urea into the market, in December 2014, as against normal monthly release of about 2.5 to three million tonnes. To do so, it had to step up imports.
While the markets may have cooled for now, this is a short-term palliative. The root cause behind the frequent shortage of urea supply is the perennial deficit in domestic availability of urea vis-à-vis requirements. The annual consumption of urea is about 30 million tonnes while domestic production is only 21 million tonnes. This leads to heavy dependence on imports, which can lead to a crisis, if required quantities are not bought in time.
The perennial deficit can be traced to our inability to increase domestic production even as demand continues to grow. During the last 15 years, not even a single urea plant — new grass-root or brownfield — has been set up. The sole factor responsible for this is the absence of a long-term and stable policy environment. This has been missing because no Government in the past has taken a clear view on dispensing subsidy for fertilisers.
Linked to this, is a bigger question to control the maximum retail price of urea, which is a six-decade old legacy. Since 1991, even as price controls were dismantled across various sectors including non-urea fertilisers such as diammonium phosphate, single super phosphate and muriate of potash etc, price control on urea has been left untouched.
In April 2010, when non-urea fertilisers was brought under the nutrient-based subsidy scheme, the Union Cabinet intended to cover urea as well. However, on the insistence of then Minister for Chemicals and Fertilizers, Mr MK Alagiri, who opined that this was unnecessary, the proposal to cover urea was dropped.
It will be naïve to attribute the continued control of urea price to the Alagiri factor alone. The reality is that all parties, across the political spectrum, want to keep control and have done their bit to perpetuate it.
Moreover, they have lobbied for keeping the price ‘artificially’ low, which is totally out of tune with general inflation and even with the price of food for sale through public distribution system.
Insisting on a low MRP for urea, when the cost of production is more than twice for efficient gas-based plants, three times for other high cost gas based units, eight times for naphtha-based plants and five times the cost of imported urea (in 2008, this went up to 10 times) has ominous implications for subsidy.
Pertinently, the new pricing scheme protects even high cost units by giving subsidy specific to each. Imported urea, anyway, enjoys unfettered subsidy without limits. This scheme scuttles initiatives to improve efficiency, cut costs, make efforts to procure feedstock and other inputs at low costs and optimise operations.
While high cost units sit complacent under the protective shield of the New Pricing Scheme for urea units (these include a number of units under public sector undertakings), low cost units have no incentive to perform better as they are not rewarded.
Low MRP leads to other maladies as well. When urea is available in India at just about $85 per tonne, as against three to four times higher price prevailing in neighbouring Bangladesh and Pakistan, large-scale smuggling to those countries is inevitable. Including diversion for industrial use, total urea thus siphoned off could be as high as 30 per cent.
Further, when diammonium phosphate and other complexes sell at over four times the urea price and muriate of potash at more than three times urea, the excessive use of urea is inevitable. This imbalance in fertiliser consumption affects efficiency, crop yield, soil health and the environment.
http://www.dailypioneer.com/columnists/oped/de-controlling-urea-production.html