Surinder Sud: More manure

While demand rises, fertiliser production stagnates due to poor pricing policies

Poor pricing policies have led to a situation where, while demand rises, domestic fertiliser production stagnates.

Despite some seemingly well-conceived recent policy initiatives by the government, the fertiliser sector continues to face problems that bode ill for it as well as for agriculture. While the domestic production of fertilisers has tended to either stagnate or drop, the consumption has been rising, widening the availability gap and necessitating record imports. No major fresh investment has come into this sector for over a decade, leading to stagnation in installed production capacity.

The much-needed micronutrients-blended fertilisers to sustain the health and fertility of soil remain elusive. The subsidy on fertilisers has risen to 80 per cent of their cost (on delivery point) because of non-revision of retail prices since February 2002. The government’s failure to pay the subsidy, including the accumulated arrears in full, has caused an acute liquidity crunch for fertiliser units.

Worse still, most policy interventions aimed at addressing these issues have failed to click. The recent decision to switch over to the import-parity-pricing mechanism for determining subsidy on the domestically-produced fertilisers was meant primarily to encourage fresh investment in fertiliser capacity addition.

This system, indeed, appeared advantageous for the industry because international fertiliser prices were higher than the domestic production costs, thus ensuring good returns for efficient manufacturers. But, the sharp fall in global fertiliser prices in the wake of falling crude prices has reduced this advantage to a considerable extent.

In fact, the government’s hope of reduction in the overall fertiliser subsidy burden, reckoned at over Rs 100,000 crore for this year, as a result of lower subsidy on imported fertilisers due to softening of global prices has also not materialised fully. Depreciation in the value of rupee vis-à-vis the dollar has eroded, even if partially, the likely gains on this count.

The newly-introduced uniform freight policy (which envisages reimbursement of actual transportation costs up to the block level to ensure fertiliser availability even in the interiors), too, has not fully served the purpose. For, the updating of freight data has been taking far too long and only rail freight is actually being paid to the industry. The transportation cost from the railhead to the dealer point is also not being paid.

Some measures have recently been mooted primarily to promote balanced use of plant nutrients and protect soil health. These included payment of nutrient-based subsidy, allowing fortification of fertilisers with micronutrients (such as zinc, sulphur, boron, iron, manganese and the like) and reimbursement of additional costs incurred on such blending.

However, the response to these moves has not been too encouraging so far because of the cash crunch and the lack of any improvement in the investment-worthiness of the fertiliser sector.

The fundamental problem of mounting arrears of fertiliser subsidy payable to the industry is yet far from resolved despite allocation of record Rs 70,000 crore for this purpose in the current year. (This includes Rs 30,986 crore earmarked for fertiliser subsidy in the budget and Rs 38,863 crore provided through supplementary grants.) Since the actual subsidy payable to the industry is likely to exceed Rs 100,000 crore despite the fall in international prices, substantial unpaid arrears are bound to be carried forward to the next financial year.

As a result of all this, the Fertiliser Association of India estimates the domestic production of fertilisers fell by 5.4 per cent in urea and 16.3 per cent in phosphatic fertilisers in 2007-08. The consumption of fertilisers, on the other hand, is estimated to have grown by about 4.2 per cent during the year.

Consequently, the import of urea has swelled to a record 6.93 million tonnes in 2007-08 and that of phosphatic fertilisers to 2.3 million tonnes. The import of both these kinds of fertilisers was merely 0.6 million tonnes, each, in 2004-05. The import-dependence for potassic fertilisers is, in any case, 100 per cent.

In the current year too, the overall fertiliser consumption is anticipated to surge by around seven per cent. The domestic production, on the other hand, has shown only a marginal increase of two per cent in urea but a perceptible decline of 12.5 per cent in phosphatic fertilisers.

It is, therefore, time that the government revisits its policies to make them relevant to the current realities. The best course, of course, would be to totally decontrol this sector and provide subsidy directly to the farmers.

surinder.sud@gmail.com