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Govt, experts talk at cross purposes on urea policy

Government's gas supply policy is guided more by subsidy concern, rather than a broad outlook of promoting right soil nutrition

Jyoti Mukul  |  New Delhi 

For long now, experts have pushed for balanced use of synthetic fertilisers. However, the government's policy has been designed to promote urea usage. This has showed up in all matters, whether it is fixing prices, giving incentives or allocating natural gas.

Provision of domestic gas for complex fertiliser was stopped in May 2014. The government felt that in a scenario where the domestic production of natural gas was falling, urea should be given priority over other fertilisers since urea prices are still controlled, while non-urea prices have been decontrolled.

The Delhi High Court last month struck down the decision and said that "reducing the price of urea at the cost of increasing the manufacturing cost of complex fertiliser would effectively be contrary to the government's policy of encouraging use of complex fertiliser".

The court ordered restoration of gas supply to Deepak Fertilisers, the only company affected by the cut in gas supply, because the other two, government-owned Rashtriya Chemicals & Fertilizer and Gujarat State Fertilizer & Chemicals were spared the cut.

Thanks to the cut in gas supply, Deepak Fertiliser's profit from the fertiliser business fell a whopping 85 per cent to Rs 22.15 crore in 2014-15 from Rs 149.15 crore in 2013-14. While for the quarter ended June 30, its profit after tax rose 14 per cent to Rs 45.33 crore, the growth was not reflective of any pick up in business. The profit included dividend income of Rs 27.50 crore from its subsidiary.

The company, in a statement on August 5, said the performance continued to be affected in the absence of gas supply, leading to the shutdown of its fertiliser plant. "Non-availability of gas continued to negatively impact the profitability of the agribusiness. Though the resumption of gas supply is awaited, business saw a substantial increase in the trading volumes, with subdued margins," it stated.

Initially, Deepak Fertilisers was allocated 0.6 mmscmd of natural gas from fields belonging to state-owned Oil & Natural Gas Corporation, and Panna-Mukta-Tapti fields owned by ONGC, Reliance Industries and British Gas. An empowered group of ministers in October 2009 allocated another 0.178 mmscmd to the company from the KG-D6 Basin operated by Reliance Industries at $4.2 per million British thermal unit.

In April 2010, within six months of this allocation, prices of fertilisers, except that of urea, were decontrolled by the government. Since there were no price caps on non-urea fertilisers, cheap natural gas was a windfall gain for the company.

Incidentally, it was the fertiliser ministry that asked the ministry of petroleum to immediately stop supply of 0.5 mmscmd of gas last year. The company protested the decision, only to be told that it could always buy imported re-liquefied natural gas from GAIL (India) as it was well connected to the gas pipeline network.

The problem started with the fall in domestic gas production from 2011 onwards. The supply from KG-D6 to power plants stopped completely and volumes meant for fertiliser companies dipped.

Largely, the fertiliser sector enjoys priority in domestic gas allocation from the KG-D6 field, as the government subsidises urea manufacturers. Since its prices haven't been decontrolled, urea continues to account for the largest chunk of fertiliser use in the country.

Since urea is the most popular fertiliser, it was decided to stop the supply of natural gas to the producers of other fertilsers. This is what affected Deepak Fertilisers. The government, however, decided to continue gas supply to Rashtriya Chemicals & Fertilizer and Gujarat State Fertilizer & Chemicals but the companies had to forfeit the extra gains from the use of cheap gas to the government.

On the petroleum ministry's proposal to cut supply to non-urea units, an empowered group of ministers had, in February 2012, asked the fertiliser ministry to arrive at a recovery mechanism for such units within three months.

The High Court, however, took exception to suspension of gas supply to Deepak Fertiliser while continuing the same to Rashtriya Chemicals & Fertilizer and Gujarat State Fertilizer & Chemicals. It ordered the government to resume the supply of gas to Deepak Fertiliser till the time the government put in place a policy to discontinue supply of gas for manufacture of complex fertilisers by other units as well.

The company argued that the suspension of gas supply was due to lack of proper guidelines on gas allocation by the department of fertiliser. The court found merit in its submission that the subsidy provided by the government is, in effect, subsidy to farmers, and is to ensure that fertiliser is available to farmers at a subsidised rate. Without interfering with the government's policy to suspend supply of gas to complex fertilisers, the court said such a move should be implemented uniformly for all manufacturing units.

The government is yet to make the next move but the fact that its gas allotment policy is directed more by subsidy concerns that impact its fiscal deficit rather than by a broad outlook of promoting right soil nutrition points to a short-sighted vision.

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First Published: Tue, August 18 2015. 21:34 IST