New urea policy fails to enthuse fertiliser firms

While the government expects the new urea policy to bring more investment, the fertiliser industry is less than enthused. New capacities to make urea, industry representatives say, will come up only if adequate fuel and timely payment of subsidy dues is ensured.

The Cabinet Committee of Economic Affairs (CCEA) cleared the policy on August 8. Officials expect the policy to result in investments worth Rs 35,000 crore in new projects as well as expansion of the existing capacities. Leading players like Indian Farmers Fertiliser Cooperative, Rashtriya Chemicals and Fertilisers and Kribhco are seen as potential investors. However, the availability of gas is not sufficient to run the existing plants. According to industry estimates, only 16.9 million tonnes (mt) of the urea capacity of 20.4 mt comes from gas-based plants.

“The existing gas-based plants are not getting the required gas and we will require additional supplies if the new policy is to work,” said Satish Chander, director general of the Fertiliser Association of India (FAI). The FAI represents domestic fertiliser-makers and has over 1,000 members.

Also, the bill for subsidies paid to fertiliser companies for selling urea at less than the cost price is mounting. This has compelled the government to revise upwards its estimated subsidy burden by 25 per cent to Rs 1,19,000 crore in 2008-09.

The government’s budgetary allocation of Rs 30,986 crore for footing the fertiliser subsidy bill for 2008-09 has already been spent and the industry is expecting a supplementary allocation of Rs 66,453 crore to get its future subsidy bills reimbursed.

The industry is also worried about the decreasing realisations from direct sales and the delay in receiving the balance amount as subsidies from the central government.

“In 1980-81, the fertiliser industry used to realise 94 per cent of the price of urea from the farmer. The government subsidy was just 6 per cent. Today the industry is realising only 27 per cent of its retail price from the farmer. The rest (73 per cent) has to come as government subsidy,” Chander said.

The concerns are significant as the investment policy is time-bound and the incentives are only for those capacity additions that come up within the next four to five years. The policy says the urea produced from capacity additions due to the revamp of the existing units within four years can carry a price tag that is equal to 85 per cent of the international parity price (IPP) of urea at that time.

Similarly, the price of urea produced from expansion of the existing units in the next five years can be 90 per cent of the IPP. Both the prices carry a rider — floor and ceiling prices.

The Confederation of Indian Industry (CII) welcomed the policy saying it would provide a level -playing field that would encourage closed units to reopen and existing units to expand. It hoped the price would be determined on the basis of the landed cost of urea at Indian ports and not only on the basis of the free-on-board (FoB) prices.