The initial optimism in the fertiliser sector soon after the Union Cabinet approved the new investment policy for urea had led to an increase in prices of fertiliser stocks over the last week. The positive mood, however, is finally beginning to give way to some searching questions. The new policy, awaited ever since its 2008 version failed to attract any response, aims to fix problems that have led to the urea sector going without any real capacity addition since 1999. Certainly, the new policy seems more able to woo investment for greenfield urea production projects or even expansion of existing units. It may possibly allow the revival, too, of some of the eight closed units of public-sector fertiliser producers such as the Fertiliser Corporation of India (FCI) and the Hindustan Fertiliser Corporation (HFCL). According to the fertiliser industry, a potential investment of nearly Rs 35,000 crore has already been lined up, including by the existing players in the fertiliser sector; nearly 8 million tonnes may thus be added to India’s existing urea production capacity. This will narrow the current gap between domestic production and demand for urea. At present, nearly 30 per cent of India’s urea requirement is met through imports, though urea is the only chemical fertiliser that can be produced wholly indigenously. For manufacturing phosphatic and potassic fertilisers, either whole or a part of the raw material needs to be imported.
The fertiliser industry's optimism arises from the fact the new policy omits, modifies or suitably addresses some of the unwelcome provisions of the flopped investment policy of 2008. One was the gas price cap of $14 per million British thermal units for the purpose of subsidy calculation which the industry felt was too low. This is now said to have been raised to $20. This is, however, worrying, as it essentially extends the subsidy regime: it would be tantamount to covering virtually the entire cost of natural gas, which accounts roughly for 80 per cent of urea’s total cost. The other plus point of the new policy for investors is that they’re assured 12 to 20 per cent post-tax returns on fresh capital in new projects. However, it is clear that both these provisions are, in fact, the very reverse of reform – they extend and broaden the subsidy regime, instead of reducing the industry’s dependence on government handouts.
In particular, these subsidy- and protection-based measures ignore and make tougher the only real solution to this sector’s problems: decontrol and inclusion in the nutrient based subsidy (NBS) system. Urea subsidies are already by far the largest part of the cost of production; prices of the product were last raised in 2010, and that too just by 10 per cent, while those of deregulated phosphatic and potassic fertilisers have surged by 30 to 50 per cent – and even more in some cases – in the past few months. This lack of pricing parity between fertilisers is causing an unbalanced application of the three major plant nutrients – nitrogen (N), phosphorus (P) and potash (K) –thus impairing the soil health and its fertility. In the absence of full reform of the entire fertiliser sector, such piecemeal policy prescriptions may actually prove counterproductive.
