The term of the Modi – government will come to an end in a little over two months from now. It is time to take stock of what it has done to the fertilizer sector which was suffering from several policy weaknesses at the time it took charge and there was great deal of expectation that it would kick off major reform.
The four major areas which needed focused attention were (i) control on all critical aspects hampering initiatives by manufacturers to reduce cost, improve efficiency and innovate; (ii) imbalance in fertilizer use affecting crop yield, soil health, environment and sustainability of agriculture; (iii) shortfall in supply of gas, feedstock/fuel in production and high price; (iv) increasing subsidy and its continuing misuse.
Unlike industries operating under decontrolled environment where manufacturers enjoy enough leeway to navigate margins, in fertilizers, this is not available. Under the New Pricing Scheme [NPS] in vogue since 2003, urea manufacturers are guaranteed 12% post-tax return on net-worth [the NPS was introduced in replacement of the erstwhile Retention Pricing Scheme [RPS] launched in 1977].
But, they are far from getting this return despite operating the plant at much higher level of efficiency than the prescribed norms for capacity utilization and consumption of raw materials and utilities [unit-specific retention price is bench-marked to these norms]. More than half of the urea units are incurring loss even as others are operating on thin margin. During 2016-17, 25 units, as a whole, incurred a negative return of 0.73%. For 2017-18, it was minus 4.71%.
This is due progressive tightening of the norms, mopping up the benefits of improvement in efficiency, disallowing escalation in fixed cost and delayed payment of subsidy dues resulting in interest cost on working capital remaining un-compensated under pricing. These adverse changes have continued under Modi – dispensation.
The increasing imbalance in fertilizer use is the inevitable outcome of disjointed policies. Under the Nutrient Based Scheme [NBS], the manufacturers of complex fertilizers such as di-ammonium phosphate [DAP] etc and muriate of potash [MoP] are allowed uniform subsidy on per nutrient basis. Moreover, the subsidy remains fixed even as escalation in cost leads to ever increasing maximum retail price [MRP].
In contrast, the urea MRP – under statutory control – is maintained at a low level [ironically, its current price is more or less the same as it was one-and-a-half decades ago] even as all escalation in cost are absorbed by increasing subsidy.
This results in disproportionately low MRP of urea vis-a-vis the MRP of complex fertilizers and MoP prompting farmers to use more of the former and less of the latter. The excessive use of urea is the root cause of deteriorating NPK use ratio. The incumbent government has done little to address these policy anomalies.
Due to acute shortfall in availability of domestic gas, the urea industry has to import 35% of its requirement. Since, imported gas comes at high price – more than twice the price of domestic gas [this is notwithstanding Modi’s efforts to renegotiate the price of imported LNG under long-term contracts], this leads to high cost of production. Juxtaposed with low MRP, it causes surge in subsidy outgo.
The way forward is intensified exploration and development efforts to get higher volumes of domestic gas to make production economical even at lower price [higher volume holds the key as without it, the field would be uneconomical despite higher price]. But, the policy of ‘differentiated pricing’ depending on the nature and ownership of field is out of sync with this overarching objective.
Finally, the current mode of routing subsidy through manufacturers and urea MRP at artificially low level is leading to increase in subsidy payments to unsustainable level. This arrangement also abets misuse of subsidy. According to Economic Survey [2105-16], only 11% of the fertilizer subsidy benefits poor farmers.
The present regime has continued with the subsisting dispensation by proclaiming its commitment in 2015 to continuation of the NPS and freezing urea MRP at existing level for 4 years till 2019.
Clearly, Modi has done little to reform the fertilizer sector. The measures such as neem coating of urea, issue of soil health cards [SHCs] to farmers and work on revival of closed plants of fertilizer PSUs – taken during his tenure – can’t be termed as meaningful reforms. The direct benefit transfer [DBT] implemented from April 1, 2018 is a misnomer as the subsidy continues to be routed through manufacturers.
Even prior to Modi, ever since, economic reforms and liberalization started in 1991, none of the ruling dispensations showed the gumption to reform the fertilizer sector.
On August 25, 1992 – under pressure from the IMF/World Bank – the then government under PV Narasimha Rao decontrolled non-urea fertilizers and abolished subsidy. But, within 5 weeks, from October 1, 1992, it restored subsidy under a new incarnation viz. ad hoc concession. It continued to route concession through manufacturers contrary to the intent of giving directly to farmers. It did not dare touching the extant RPS and subsidy scheme for urea.
In 2003, the then NDA – government under AB Vajpayee implemented a ‘group-based’ pricing under NPS to lead eventually to a ‘uniform’ subsidy as per a road-map laid by Expenditure Reforms Commission [ERC] in 2000 for phased decontrol of urea in five years. Yet, the unit-wise pricing dispensation has continued.
In 2012, a group of ministers [GoM] under the then UPA – regime recommended a uniform subsidy on urea on the same lines as NBS for non-urea fertilizers. But, the idea was shelved.
The reason for inaction/backtracking by successive governments is sheer vote bank politics. Urea – most popular fertilizer – is available to all farmers at a fraction of the cost. If, it is decontrolled and subsidy given only to poor farmers directly [this indeed is the sine qua non of meaningful reforms], parties fear backlash. So, none including BJP is able to muster the courage.
Undisputedly, Modi remains the only ‘decisive’ and ‘bold’ leader. What if, he gets a clear mandate again? Will he crack the whip?
One can only wait and watch!