Emboldened by the success of direct benefit transfer [DBT] in LPG and having announced DBT for kerosene subsidy in 26 districts to begin with from April 1, 2016, the government is currently examining various possibilities for taking similar initiatives in fertilizers [besides food].
Subsidy syndrome
While, these efforts are welcome, it needs to take stock of the present state of fertilizer industry in India as its health is a pre-requisite for ensuring un-interrupted supply of fertilizers to farmers at affordable price. In a pre-budget meeting with finance minister, Arun Jaitely, the Fertiliser Association of India [FAI] told him that at present, manufacturers have outstanding subsidy dues of Rs 45,000 crores. It urged the government to clear these in three installments.
Unlike any other industry where almost the entire realization from selling the manufactured product comes from the consumer, fertilizer is unique as a major portion of this is by way of subsidy payments from the government. Ironically, in case of urea – most widely used nitrogenous fertilizers – because of selling price [under control] remaining literally frozen for one-and-half decade and production cost continuing to increase, subsidy now accounts for over 75% of the realization from sale.
This makes all manufacturers vulnerable to release of subsidy dues by the government. Unfortunately, the latter treats these payments on low priority and considering the stress of fiscal consolidation [indeed, this is perennially the case], invariably the axes falls on fertilizer subsidy. One does not need an understanding of complex maths to fathom the dastardly implications for manufacturers when these payments are not made in time.
Bureaucratic controls & micro-management of industry
The extant arrangements for subsidy disbursal are susceptible to obtrusive controls by the bureaucracy. When, a manufacturer faces increase in cost of production due say, increase in input cost or increase in tax rate etc, he has to approach the government for seeking reimbursement of additional cost as subsidy since, the option of increase in selling price is not available.
This in turn, offers a golden opportunity to the bureaucrat to exercise his discretion to take a view whether to allow the extra cost, when to allow and how much to allow. In the current environment, when most of controls elsewhere in the economy have gone [courtesy, reforms], this carries special appeal. Therefore, the officials have been exercising too much of authority and discretion pushing it to a point of micro-managing the industry.
Such micro-management has been fatal for the industry. There have been umpteen instances of legitimate cost increases either disallowed or allowed after considerable delay and too much of control up to the last mile. Some glaring instances are mentioned below:-
Urea
More than a decade delay in notifying increases in ‘fixed cost’ to urea manufacturing units which has not been paid till date.
The marketing margin paid by manufacturing units to Reliance Industries limited [RIL] on gas supplies from KG-D6 have not been reimbursed despite orders of Delhi High Court [DHC].
On production in excess of 100% capacity utilization, fixed cost is reimbursed at lower end of industry range Rs 1600 – 2300/ton thereby discouraging manufacturers to produce more.
Non-reimbursement of VAT [value added tax] paid by manufacturers on gas purchase in states such as Uttar Pradesh which unavoidably adds to production cost.
P&K fertilizers
Supply of domestic gas to manufacturers denied despite directive issued by empowered group of ministers [EGoM]. Even orders of DHC to resume supply are not complied.
Delay in notification of subsidy under NBS [nutrient based scheme] even as manufacturers are required to print subsidy rate on bags along with MRP from day one of financial year.
85-90% of subsidy is released on receipt of product by dealers and balance 10-15% paid on state’s confirmation of sale to farmers and certification of quality. This leads to delayed payments.
Continued control on movement plan and payment of rail freight on unit-specific despite announcement of government’s intent to free and give lump-sum/uniform freight.
Import vulnerabilities
The problems of industry get exacerbated by high level of dependence on imports. Over 60% of ‘N’ requirement is met from import of gas for production of domestic urea, ‘N’ from imported DAP [dia-ammonium phosphate] and imported urea. Import dependence in potash or ‘K’ is 100% whereas, in phosphate or ‘P’, this is 93%. In ‘P’, apart from imported DAP, a good portion is met from domestic production based on imported raw materials/intermediates viz., rock phosphate/sulphur and phosphoric acid.
This increases our vulnerabilities when global demand-supply situation is tight. In such a scenario, we end up paying exorbitant price for imported of raw materials as well as finished products. Even when, global supply is easy resulting in lower prices [as at present], weakening rupee prevents transmission of full benefit. Moreover, the benefit of reduction does not accrue to industry as the same gets mopped up by reduction in subsidy.
Imbalance in NPK use
For P&K fertilizers, since uniform subsidy rate under NBS remains ‘fixed’ even under a scenario of increasing import prices [and reduced when import price declines], their selling prices keep increasing even as MRP of urea remains frozen at low level. The resulting imbalance in prices leads to increasing imbalance in NPK use ratio and its deleterious effect on soil health, crop yield and farmers income.
In 2012, a GoM had recommended NBS for urea. By bringing the policy dispensation on par with that of P&K fertilizers, this would have helped reduce imbalance in prices and in turn, imbalance in NPK use ratio. The government was fully geared to implement but at some point on the way, brakes were applied and both farmers and industry are saddled with adverse fall-out of policy inaction.
Industry on the brink
In short, the obtrusive controls and delayed payment of subsidy dues, substantial disallowance of cost, high dependence on imports and un-coordinated policy actions are having a disastrous impact on the industry. Nearly half of manufacturing units are making losses and on the verge of closure. The return on investment for the industry is negative. The interest cost on pending subsidy dues about Rs 5000 crores alone exceeds its profit!
A number of fertilizer plants are owned by business houses such as Tatas and Birlas who are cross-subsidizing losses in fertilizer segment from other businesses. But, this is an unsustainable situation which is evident from the decision of these houses to exit fertilizer. But, the perception of this industry is so bad that they did not find takers forcing them to shun the plans at least for now.
Course correction & way forward
The present situation is akin to ‘a house on fire’. The fire needs to be extinguished as an immediate priority. The government should clear all subsidy dues within a reasonable time frame [3 years at the outer limit] and implement all decisions including directives of court. It should introduce NBS for urea without further delay. This will help restore financial health of the industry which on physical parameters [consumption of fuel, utilities etc] is among the best in the world.
The government should aim at removing price and distribution control on urea from April 2019 when it can introduce DBT. During the interregnum, efforts should be made to secure long-term supplies of gas at low price [re-negotiation of contract terms with RasGas/Qatar is a good move]. The supply of domestic gas should be boosted by intensifying exploration and production.
Alongside, joint ventures [JVs] on the lines of Oman ammonia/urea project [a JV between Oman Oil Company and IFFCO & KRIBHCO, the cooperative majors in India] in countries where gas is available in plenty and cheap should be planned. Urea import should be de-canalized to make way for supplies from the JVs and other sources at competitive price. Depending on price at which gas is available and resulting domestic production cost, an appropriate level of tariff may be imposed.
For P&K fertilizers, where our raw material base is negligible, focus on JV abroad has to be even greater. Besides, Indian companies should vigorously pursue acquisition of mines for rock phosphate and potash abroad. Import duty on raw materials should be lowered to give competitive edge to indigenous DAP more so because duty on latter is bound at 5% under WTO.
These steps will help in securing supplies of fertilizers at much lower prices leveraging the benefits of JVs and competitive pressures. With DBT, effective price to farmers will be even less. DBT will also empower them to decide – based on soil analysis – which fertilizers to use and how much. This will help correct imbalance in NPK use and improve soil health.
This will also ensure ‘stability’ of policy environment and make it ‘attractive’. Investment including foreign will pour and there will be growth of the industry. More of domestic supplies will mean less import and further lowering of subsidy burden [apart from saving due to plugging of leakages under DBT]. This will help fiscal consolidation.
The need of the hour is to end the blatant neglect of this crucial sector and implement the corrective steps listed above. Modi should bite the bullet now before it is too late.