New urea policy revives self-reliance push, but demand keeps racing ahead

The Centre's new investment policy could attract up to Rs 1 trillion into urea production, but rising demand, subsidy distortions and weak private participation may keep India reliant on imports

Earlier this month, the Union Cabinet, after a gap of almost 14 years, approved a new National Investment Policy for Urea (NIPU-2026) with the objective of setting up 8-9 gas-based urea plants - both brownfield and greenfield - with a combined production capacity of 10 million tonne (MT) in another attempt at self-reliance over the next few years.

 

The plants will be set up by both the private and government sectors, and even cooperatives. The new investment framework is an extension of the 2012 New Investment Policy (NIP) with some revisions.

 

Releasing the policy, Union Information and Broadcasting Minister Ashwini Vaishnaw said that India’s urea consumption is around 40 MT, while current domestic production is close to 30 MT, with the gap being filled by imports. The new policy is expected to help bridge the gap that is currently dependent on imports.

 

Each of the new plants will have an approximate production capacity of 1.27 MTPA.

 

The new policy has also assumed the approximate project cost of Rs 11,000 crore for greenfield category and Rs 9,000 crore for brownfield category, said sources, based on an exchange rate of Rs 90 to the dollar. This would put cumulative investment by way of the new policy close to Rs 90,000 crore-Rs 1 trillion over the next 5-8 years.

 

In the new investment policy, a guaranteed buy-back is also likely to be available to the units for a period of eight years from the date of start of production.

 

Key changes from NIP-2012 also include the separation of fixed and variable costs for greater transparency, the introduction of a viable return on equity (RoE) band with a floor at 12 per cent and a ceiling at 16 per cent, and mitigation of foreign exchange risk through conversion of fixed costs into the rupee after four years based on prevailing exchange rates.

 

"These measures are estimated to result in savings of over Rs 250 crore for each plant established under NIPU-2026 compared to NIP-2012," the ministry said in a statement.

 

India currently imports around 26 per cent of its annual urea requirement, which has placed a heavy burden on the exchequer because of the West Asia crisis.

 

The NIP, however, is not new - since 2012, the Centre has been tweaking the NIP multiple times to suit the requirements of fertiliser companies and also to fine-tune it per changing dynamics, be it gas pricing or fixed cost calculations.

 

Under the old NIP 2012, which expired in October 2019, six new urea units were set up. Of these, four units were established through joint ventures with companies of nominated public sector units (PSUs), and only two by private companies.

 

The new urea units set up under NIP 2012 added production capacity of 7.62 MT, thereby increasing total indigenous capacity from 20.75 MT in 2014-15 to 30.66 MT in 2024-25.

 

Thereafter, another exclusive policy for revival of the Talcher unit of FCIL through JVC of nominated PSUs namely TFL by setting up new greenfield urea plant of 1.27 MT through Coal gasification route was approved. More recently few years back, the Union Cabinet also approved another proposal to set up a new Brownfield Ammonia Urea Complex of 1.27 MT within the existing premises of Brahmaputra Valley Fertiliser Corporation Limited (BVFCL) in Namrup, Assam.

 

As a result of all these, India currently has 33 operational urea manufacturing units with a total reassessed or installed capacity of 26.94 MT, of which 27 units, or almost 85 per cent, are more than a quarter century old.

 

But just as India’s domestic urea production rose, so did demand.

 

In fact, rise in demand for urea has outstripped domestic urea production despite the new plants. As a result, despite looking for self-sufficiency through NIP 2012, the country is still reaching for the same objective in 2026.

 

The prime reason for this state of affairs is the over-reliance on paddy, wheat, and a growing clamour for maize among farmers, the last of which has become a prime crop due to its extensive use in ethanol. A jump in prices has also ensured that maize acreage has seen a sharp escalation. As the area under paddy and maize rose, so did the consumption of urea (See chart).

 

Since the NIP 2012, India’s urea consumption has risen from 29.56 MT in 2011-12 to almost 40 MT in 2025-26, a CAGR of around of 2.32 per cent. Paddy acreage during this period has grown by a CAGR of 1.29 per cent while that of maize has risen by 3.58 per cent and wheat by 0.84 per cent. Clearly, the rise in maize cultivation has been one of the main reasons behind the growth in urea consumption.

 

Also, rising consumption shows that pilferages and leakages have only grown over the years. Though, there is no official data, anecdotal evidence suggests that a large part of India’s annual urea consumption goes to non-agriculture usages as the price differential between industrial grade urea and non-industrial grade (or agriculture grade) is substantial enough to make it an attractive option.

 

Some industry players said that while technical or industrial grade urea is usually available at around Rs 85-90 per kg, the agriculture grade urea is available at a highly subsidised rate of just Rs 5 per kg.

 

“This makes it a prime candidate for diversion and pilferage,” a senior industry official said. Cutting down on this by raising the long delayed retail price of urea is one way to check diversion and pilferage.

 

Presently, the landed price of imported urea is close to Rs 3000-4000 per 45 kg bag while the same is available to Indian farmers at a heavily-subsidised Rs 265-270 per bag. A government assessment shows there are 163 districts out of a total of 730 were maximum urea consumption happens. The bulk of these districts are in the states of Punjab, Haryana, west Uttar Pradesh and also bordering states of West Bengal and Assam.

 

Also, the bulk of plants both in NIP-1 and NIP-2 are proposed to be set up in cooperative, public sector, or by state government, with only limited private sector involvement. The reason is that with profits capped and return on investment (RoI) pre-decided, private participation will continue to be elusive despite attractive subsidy proposals.

 

“India’s urea sector crisis presents a rare window of opportunity to undertake long overdue structural reforms that can strengthen both fiscal sustainability and supply resilience,” a recent policy brief by the Indian Council for Research on International Economic Relations (Icrier) showed.

 

It should include gradual decontrol of urea through a farmer-centric Direct Benefit Transfer (DBT) mechanism, rationalisation and expansion of the Nutrient-Based Subsidy (NBS) framework, promotion of balanced and sulphur-based nutrient management, diversification of fertiliser import sources and feedstock, establishment of strategic fertiliser reserves, and accelerated investments in domestic production of green ammonia and other low-carbon fertiliser inputs.

 

More fundamentally, fertiliser policy must move beyond its traditional role as an agricultural support instrument, the brief said.