An empowered group of ministers (EGoM) under Finance Minister Pranab Mukherjee has cleared the proposal to free the prices of urea and bring it under the Nutrient Based Subsidy (NBS) policy. The government has decided to raise urea prices by 10 per cent in the first year of the policy, after which the industry would be free to determine the prices.
The NBS policy came into effect on April 1, 2010 to encourage balanced usage of fertilisers and rationalise the incidence of subsidy. Under the policy, fertiliser prices are not administered by the government and companies are free to fix their retail prices.
Earlier in June, the committee of secretaries (CoS) formed by Mukherjee under the chairmanship of PMEAC member Saumitra Chaudhuri had finalised a draft model on how urea subsidy would be distributed under the NBS policy. The proposal got stuck as the minister for chemicals and fertilisers MK Alagiri had reservations over the model. He felt it would deprive farmers of their due.
The minister is now learnt to have given his green signal after making minor changes to the draft. It will be sent to the Cabinet Committee on Economic Affairs, which would sanction it, a senior official in the Department of Fertilisers told Business Standard.
“We see this as an extremely positive step by the government. It augurs well for all urea producers as they have a more transparent mechanism of subsidy determination along with the power to price their product at the industry level, which would result in better control over their profitability. It would also pave the way for a new urea investment policy," said Tarun Surana, research analyst, Sunidhi Securities and Finance Ltd.
The development was positive for all urea players such as Chambal Fertilizers, Nagarjuna Fertilizers, Tata Chemicals, NFL, RCF and Zuari Industries among others, Surana added.
NBS policy coverage for urea is expected to bring in more transparency and investments into the sector, which relies heavily on imports and suffers from a lack of production capacity. There had been no fresh investment in the sector for more than a decade because of uncertainty in the pricing structure.
At present, the price of urea is Rs 5,310 a tonne, which was increased from Rs 4,830 a tonne in 2010. Imports of urea have risen sharply to six million tonnes in 2010-2011 from 0.64 million tonnes in 2004-05. Last year, the total consumption was 28 million tonnes, of which 22 million tonnes was met through domestic production, according to official estimates.
“This an extremely welcome step for the Indian fertiliser industry. It remains to be seen how urea prices would be structured now. The industry has to recover their costs now,” said Satish Chander, director general, Fertiliser Association of India.