New Delhi: The government on Friday approved a new policy for investments in urea manufacturing to increase domestic production and cut subsidies.
Currently, the government fixes the price at which a producer sells to the government—called the producer’s price—and the maximum retail price that is paid by a farmer, which is typically lower than the producer’s price. The government fills in the gap with a subsidy. The new policy replaces one in which producers were paid on a so-called cost plus 12% post-tax profit.
The government will now link the producer’s price to the import parity price, or the price at which urea is imported. Mint had reported on the possibility of such a policy change on 24 August last year.
Urea, which mainly contains nitrogen, is the most widely used fertilizer in India. In the past four years, the country has increasingly imported urea with rising domestic demand and stagnant local production. Urea imports have risen from 0.6 million tonnes, or mt, in 2005-06 to 6.9mt in 2007-08, show data from industry body Fertilizer Association of India, or FAI. Urea imports are likely to touch 7mt in the financial year to March 2009, FAI estimates. The new policy will apply to revamp and expansion of existing factories, greenfield projects and revival of eight closed units of Fertilizer Corporation of India Ltd and Hindustan Fertilizer Corp. Ltd, an official statement said.
Some industry experts, who did not wish to identified, said given the fluctuating crude oil prices and “grey areas” in the policy, it is unclear whether the subsidy burden will come down. In the sector, subsidy payments have skyrocketed in the past four years from Rs15,779 crore in 2004-05 to an estimated Rs95,000 crore in 2008-09, or 1.9% of the gross domestic product, according to department of fertilizers’ data. Last year, the subsidy stood at Rs40,338 crore.
The policy lays down both a floor price of $250 (Rs10,550) per tonne and a ceiling price of $425 for the import parity price benchmark. The level of benchmarking varies from 85% for production from revamped projects, 90% for production from expansion of existing factories and 95% for production out of revived units.
The policy has evoked mixed response from industry experts. “Directionally, the policy is correct and, in the longer term, will help in increasing domestic production and even bring down subsidy,” said an industry expert on condition of anonymity. Another industry expert, who also did not wish to be named, said, “it is not clear the price at which natural gas (which constitutes around 80% of production cost) will be available. So, it is difficult to comment till the government clarifies on this.”