The urea problem

Now, it is time to decontrol prices

The government's decision to pool domestic and imported natural gas and charge a uniform price from all the gas-based urea manufacturing units might well bring down the cost of urea production - and, thus, reduce fertiliser subsidy. Currently, each urea plant has to pay different prices for gas, depending upon the combination of domestic gas and re-gasified and liquefied natural gas. About 27 of the country's total 30 urea units have by now switched over to using natural gas as their main feedstock. Uniform pricing will enable them to concentrate on efficiency improvement for better returns, instead of worrying about input prices. The government expects the cost of domestic urea production to drop below that of imported urea following the implementation of the new gas pooling and pricing system. This should spur the domestic industry to produce more than its rated capacity, thus reducing the dependence on imports.

Already, there are reports of widespread shortages. At present, domestic urea production hovers around 23 million tonnes (mt), against the estimated demand of around 30 mt. Even after taking into account about two mt of urea that is sourced from Oman under the urea offtake agreement, there is still a wide supply gap of around five mt that needs to be bridged through imports. The worrying factor is that while the demand is projected to swell to around 34 mt by 2017-18 and further to 38 mt by 2024-25, there isn't much hope of any substantial addition to the installed production capacity. Even if the government's expectation of additional urea production of around 3.7 mt over the next four years as a result of revised energy norms comes true, the need for imports would still be high. Indeed the government's gas pooling move comes soon after another welcome policy change in the urea sector, under which the domestic urea producers have been allowed to coat their entire urea output with neem extract to make it more user- and environment-friendly. Such coating of urea granules helps to reduce the wastage of urea applied in the fields by slowing down the release of nitrogen, thus allowing the farmers to use smaller doses.

However, these piecemeal measures are unlikely to end the woes of the fertiliser industry, which are rooted mainly in the government's reluctance to decontrol urea by bringing it under the nutrient-based subsidy (NBS) regime. By keeping urea prices far lower than those of the decontrolled phosphatic and potassic fertilisers, the government is needlessly encouraging higher consumption of urea, causing grave imbalance in nutrient application to the detriment of soil health and its fertility. Extension of the NBS to urea and ending the administered pricing regime will offer several gains, including balanced use of plant nutrients, improved soil health, enhanced crop yields and reduced fertiliser subsidy. There is also much merit to the idea of direct payment of fertiliser subsidy to the farmers in cash, as recommended by the Shanta Kumar committee on food sector reforms. This would help eliminate the diversion of highly subsidised urea to non-agricultural uses as well as its smuggling abroad. Both farmers and the fertiliser industry are likely to benefit from this well-advised reform.