Committee finalises subsidy for urea plan, EGoM to give approval

The committee of secretaries (CoS) headed by Planning Commission member Saumitra Chaudhuri has finalised the draft proposal on bringing urea under the Nutrient Based Subsidy (NBS) policy, which would seek to rationalise the payout structure.

The ball is now in the court of the Empowered Group of Ministers (EGoM) that would take a final call on this and also consider the proposal to free urea prices from government control.

The panel, which had met Friday, has granted its in-principle approval to the draft proposal and has forwarded it to the EGoM for final approval. The EGoM was earlier scheduled to meet on Tuesday but this has been postponed for a later date to ensure the attendance of all key ministers.

The draft proposal has fixed the subsidy content for urea within the range of Rs 4,000-4,200 a tonne based on the prevailing gas prices in 2009-10, while the industry had asked the quantum of subsidy to be fixed between Rs 4,600 and Rs 5,600 a tonne, based on the gas prices in the last financial year. The report has also recommended conversion of naphtha-based units to gas-based producers within the next three years for uniform implementation of NBS.

It has also looked at the option of creating three subgroups for gas-based units based on their conversion prior before and after 1992, as with the existing norms.

The subsidy amount has been divided into Rs 4,000, Rs 4,600 and Rs 5,600 a tonne with the condition of bringing it down to Rs 4,000 a tonne within the next three years. This recommendation has been opposed by some of the fertiliser units like Nagarjuna Fertilisers and Chemicals Ltd and DCM Shriram.

The proposal has also recommended steps to gradually decontrol the prices of urea from the government’s control, in line with other phosphatic and potassic fertilisers. The government had already freed prices of all non-urea fertilisers since April last year and brought these under the NBS policy.

“The basic objective is to rationalise the overall subsidy structure for urea by bringing it under NBS. However, decontrolling its prices is a political issue, which would be done in a phased manner,” a senior official from the Department of Fertilisers said, on condition of anonymity.

The EGoM is also likely to finalise the new urea investment policy as the existing one has failed to attract any investments in the greenfield or brownfield projects in the sector in the backdrop of rising gas prices.

Once the EGoM headed by Finance Minister Pranab Mukherjee gives its nod, the draft proposal would be sent to the Cabinet for final approval.

In January, the EGoM had decided to set up a CoS under the Planning Commission to come out with a report on coverage of urea under NBS policy within a month. However, the process took time due to stiff resistance from the industry, which wanted a higher subsidy payout due to a spike in the international prices.

“The move towards nutrient based subsidy (NBS) in non-urea fertilisers is an important measure by the government towards curtailment of subsidy and attainment of a stronger bargaining position in price negotiations with foreign suppliers of inputs and fertilisers,” said a research note by Icra.

Urea is the key fertiliser consumed within the nitrogenous fertilisers segment and accounts for around 50 per cent of all fertilisers consumed in India.

The domestic consumption of urea has grown steadily, at a compounded annual rate of 5.2 per cent during the period from 2004-05 to 2009-10. The production of urea in this period remained stagnant at around 20-21 million due to feedstock constraints and lack of fresh capacity on account of policy uncertainties, thereby resulting in growth in imports.

Under the NBS, the subsidy rates are calculated based on the benchmark import price of the commodity, from which the retail price is deducted to arrive at the standard subsidy rate. The subsidy for the specific nutrient is arrived from the standard rate based on percentage of the nutrient content.