Urea needs decontrol

Fresh fertiliser policy will fail without overall reform

The new investment policy for urea that has been cleared by an empowered group of ministers has a few welcome features. Its success, though, measured in terms of enticing fresh resources to the sector, will depend critically on three things: the availability of natural gas, a stable fertiliser policy regime, and the overall progress of sector-wide reform. The new policy reportedly seeks to ensure a minimum 12 per cent post-tax return on the capital, which should make prospective investors happy. So should the proposal to fix separate bands of floor and ceiling cost for urea produced by the new plants (greenfield projects), the expansion of existing plants (brownfield projects) and a more efficient calculation of subsidy support, based on the concept of import parity price for gas. However, the suggested gas price cap of $14 per million British thermal units – up to which the new plants will be compensated fully, through subsidies, for their feedstock cost – may still irk potential investors, as they will have to take a hit if the actual price overshoots that level. It is unclear, however, why fertiliser manufacturers should expect to be completely insulated from risk.

 

That said, however, the actual availability of gas remains a constraint. The bitter truth is that these positive features of the new policy may not suffice for investors to commit their resources to the sector, or for banks to offer finance, unless the government also ensures new units an adequate supply of natural gas, the most preferred feedstock for urea production. The urea industry has recently been hit by a severe shortage of gas; the deficit has been as much as 35 per cent of what is required. This is despite the government’s avowed assurance that the fertiliser sector will be given the highest priority in gas allotment. Though much of the deficit has since been made up with the additional allocation of gas from the Krishna-Godavari basin, no provision has yet been made for providing gas to new units. Urea plants in southern states have, in particular, been hit by the gas crunch.

Overall, the current policy environment in the urea sector is far from investor-friendly. Though urea is Indian agriculture’s major fertiliser input, accounting for over 50 per cent of total plant nutrient consumption, and is the only fertiliser that can be manufactured wholly indigenously, it is yet to be freed of stifling government controls — even though all other fertilisers have been decontrolled. Not only is the retail price of urea still fixed by the government, but the nutrient-based subsidy (NBS) regime, applicable to phosphatic and potassic fertilisers, has also been denied to urea. The import of urea, too, has not been decanalised — only selected public sector enterprises are allowed to buy it from abroad. In fact, the old investment policy for the urea sector, announced in 2008, failed to attract any fresh funding chiefly because the government’s overall approach was deficient on these counts. Unless urea is completely decontrolled and brought under the NBS system – or the subsidy system is completely overhauled to focus on end-users – and the industry is allowed freedom to take normal business decisions in order to remain economically viable, it is futile to expect a fresh inflow of capital.