Every time a rumour surfaces about an upward revision in gas prices, the fertilizer industry catches a chill. The nervousness in the industry about the pricing of the Reliance Industries Ltd (RIL) Krishna Godavari natural gas and the Federation of Indian Chambers of Commerce and Industry demand on “declared good” status have to be seen in tandem.
Both are fraught with implications: in fiscal 2007-08, the fertilizer subsidy bill is expected to cross Rs50,000 crore with a carryover of Rs8,000 crore from last year. In addition, pricing issues have long been known to be at root of the skewed nitrogen phosphorus potassium (NPK) ratio in agriculture, mainly due to excessive use of urea over phosphatic and potassic fertilizers. The pricing of feedstock, naturally, raises conflict of interest all round.
At one level, it is a conflict at the ministry level: the petroleum ministry wants the price of gas to be determined through competitive bidding. The fertilizer ministry wants this to be considered carefully as it has to bear the brunt of higher feedstock prices leading to higher producer subsidies. The industry, too, is scared of higher prices.
The list of problems is long. Over the next few years, it is expected that there will be a 21% shortage of gas supplies for the fertilizer industry. This has been aggravated by a skewed gas usage pattern: from an evenly balanced (50:50) between power and fertilizer sectors in 1990-91 to 71:29 in favour of power by 2005-06.
Private suppliers of natural gas such as RIL rightly sense an opportunity in this. The industry’s problems are of its own making and those created by the government. These are legacy problems dating back to the licence raj and, unless these issues are sorted out, a “crisis” will surface every time there is a price hike or, for that matter, a new opportunity, in the business sense of the term.
Different states have different rates of sales tax on natural gas. When coupled with the cost and pricing complexities in the sector, such differing rates and denial of input tax credit under the value added tax by some states (including Assam and Madhya Pradesh, states that have fertilizer units in their territory) only muddles the picture further.
This is but natural, given that the government interferes in price formation for fertilizers (urea especially) right from production to farm-gate sale.
What is a normal problem of calculating costs and prices by a well-run unit, is rather complicated in this case: the “industry” is fragmented along technological, vintage and capacity lines. Further, the cost structure varies not only from unit to unit but also month to month. Due to this, and other reasons, the industry is simply unable to respond to any sudden changes in price or pricing formula of inputs. Pricing complexity, that has evolved over time, makes it difficult to give precise answers to even simple questions such as the amount that can be supplied at a particular cost, the final cost of transportation, etc.
In a situation where the market alone determines output, the less efficient plants would die out. This, however, is not the case here. The government does not let this happen; nor is it able to set the problem right.
There are no easy answers or solutions, for that matter, to these problems. It is also not true that efforts have not been made to sort out these issues. Since 2003, the fertilizer ministry has been trying to consolidate the industry and induce efficiency at all levels. It launched a three-stage scheme to give effect to these changes.
While some gains have been made, the plants are still classed into six groups (based on technology) and further into three types (on financial concessions) within each technological grouping, giving rise to 18 types of plants! It is unlikely that these problems will disappear any time soon.
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