Policy tweaks boost India's fertiliser sector
The country's import dependence for urea stands at 20-25% of the total demand
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The fertiliser sector is witnessing a churn, on a scale not seen for long.
Direct benefit transfer (DBT) in sales, neem-coating of urea, pooled price of gas for urea units, changes in pricing policy and on related to subsidy payments are among some of the recent ones. All are aimed at streamlining the industry and boosting urea production, to ensure more fertiliser is made cheaper, in the highly regulated and subsidised regulated sector.
The country’s urea import dependency stands at 20-25 per cent of demand, while it is around 90 per cent for phosphates and 100 per cent for potash. Urea is the most consumed fertiliser.
The process is expected to get a further boost when the second stage of the new pricing policy from 2018. The Centre will use three slabs to recognise feedstock requirement to estimate production cost. These slabs will ensure fertiliser plants keep a check on energy consumption, to ensure production cost is manageable.
However, the industry says fresh investments are a must to match the energy requirement, with the new pricing policy. This will have an impact on their working capital. “As of now, most urea plants in the country have weighted average energy of around six gcal a tonne, which we have managed to bring down from nine gcal a tonne,” says a senior industry official. “To lower it further, fresh investments are needed, which the industry might find difficult to raise.”
A fertiliser unit’s production cost is based on two main factors— variable cost (largely raw material expenditure; in this case, gas) and fixed cost (labour, plant, etc). The Centre gives subsidy based on the cost of production, which depends on the price at which a unit gets gas. A unit that gets cheaper feedstock will have lower cost of production. Gas pooling for urea has ensured all manufacturing units get this vital raw material at a uniform price. However, as soon as production crosses reassessed capacity, subsidy calculation gets linked to the import parity price.
The average weighted price of imported urea had dropped almost 33 per cent from 2015-16 to 2016-17. Companies had shied away from producing more than their reassessed capacity, as the reimbursements weren’t enough. The Centre had last month tweaked the import parity price calculation for imported urea to correct this, to ensure imports remained lower.
The biggest change is a decision to stop subsidy payment to companies from June 1, unless they sell through point-of-sale devices, thereby ushering in a revised form of direct benefit transfer (DBT).
DBT in fertiliser is different from those in cooking gas or pension schemes.
The subsidy component gets credited into the bank account of the fertiliser firm within a week of purchase and the buyer (the farmer) will continue to get the fertiliser at the existing low price. The traditional DBT model was tweaked for fertiliser because the difference between the subsidised rate and the market price is sometimes more than double. The industry is required to install over 200,000 PoS devices across the country, estimated to cost Rs 400 crore.
“We are not opposing DBT in fertiliser,” says Satish Chander, Director General of Fertiliser Association of India (FAI). “But we want it to be launched in a big way only after all outstanding dues are cleared and a robust system is established at the dealer level, so that there are no glitches and chaos during the peak sale season.”
The DBT pilot was launched in 19 districts from November 2016. However, the subsidy has not reached the companies, despite assurances of it being credited within a week.
Direct benefit transfer (DBT) in sales, neem-coating of urea, pooled price of gas for urea units, changes in pricing policy and on related to subsidy payments are among some of the recent ones. All are aimed at streamlining the industry and boosting urea production, to ensure more fertiliser is made cheaper, in the highly regulated and subsidised regulated sector.
The country’s urea import dependency stands at 20-25 per cent of demand, while it is around 90 per cent for phosphates and 100 per cent for potash. Urea is the most consumed fertiliser.
The process is expected to get a further boost when the second stage of the new pricing policy from 2018. The Centre will use three slabs to recognise feedstock requirement to estimate production cost. These slabs will ensure fertiliser plants keep a check on energy consumption, to ensure production cost is manageable.
However, the industry says fresh investments are a must to match the energy requirement, with the new pricing policy. This will have an impact on their working capital. “As of now, most urea plants in the country have weighted average energy of around six gcal a tonne, which we have managed to bring down from nine gcal a tonne,” says a senior industry official. “To lower it further, fresh investments are needed, which the industry might find difficult to raise.”
A fertiliser unit’s production cost is based on two main factors— variable cost (largely raw material expenditure; in this case, gas) and fixed cost (labour, plant, etc). The Centre gives subsidy based on the cost of production, which depends on the price at which a unit gets gas. A unit that gets cheaper feedstock will have lower cost of production. Gas pooling for urea has ensured all manufacturing units get this vital raw material at a uniform price. However, as soon as production crosses reassessed capacity, subsidy calculation gets linked to the import parity price.
The average weighted price of imported urea had dropped almost 33 per cent from 2015-16 to 2016-17. Companies had shied away from producing more than their reassessed capacity, as the reimbursements weren’t enough. The Centre had last month tweaked the import parity price calculation for imported urea to correct this, to ensure imports remained lower.
The biggest change is a decision to stop subsidy payment to companies from June 1, unless they sell through point-of-sale devices, thereby ushering in a revised form of direct benefit transfer (DBT).
DBT in fertiliser is different from those in cooking gas or pension schemes.
The subsidy component gets credited into the bank account of the fertiliser firm within a week of purchase and the buyer (the farmer) will continue to get the fertiliser at the existing low price. The traditional DBT model was tweaked for fertiliser because the difference between the subsidised rate and the market price is sometimes more than double. The industry is required to install over 200,000 PoS devices across the country, estimated to cost Rs 400 crore.
“We are not opposing DBT in fertiliser,” says Satish Chander, Director General of Fertiliser Association of India (FAI). “But we want it to be launched in a big way only after all outstanding dues are cleared and a robust system is established at the dealer level, so that there are no glitches and chaos during the peak sale season.”
The DBT pilot was launched in 19 districts from November 2016. However, the subsidy has not reached the companies, despite assurances of it being credited within a week.