The government may have shied away from urea pricing reforms. But its decision to give urea a coating of neem oil may have triggered a transformation in the sector.

Responding to a question in Parliament, the government said urea sales till 20 March stood at just over 29 million tonnes, implying a 1.4% drop from the previous fiscal year. If sales trends hold for the next couple of days, then the current fiscal year will mark the second consecutive year of reduction in urea sales, a first in at least a decade.

In the decade to 2015-16, sales of urea—the widely used crop nutrient— on an average expanded 3.2% per annum and sales did not fall in a single year.

With the government linking the sale of fertilizers to Aadhaar, thereby tightening the sale process, urea sales may continue to trend lower in the coming crop season, says Aditya Jhawar, analyst at Investec Capital Services (India) Pvt. Ltd.

The mandatory coating of urea with neem oil triggered the current downtrend in sales. It curtailed the diversion of urea to non-farm uses and prompted efficient use of the crop nutrient, says S.K. Mishra, chief executive officer at GSFC Agrotech Ltd, a subsidiary of Gujarat State Fertilizers and Chemical Ltd. According to Mishra, the same plot of land now roughly requires 10% less urea thanks to neem coating and its benefits.

If indeed the curtailment of the illegal diversion of urea and better efficiencies are weighing on current sales, the industry has nothing to worry about. Sales will stabilize soon. But larger trends are at work.

G.V. Ramanjaneyulu, executive director at Centre for Sustainable Agriculture, agrees that neem coating has increased urea usage efficiency. But he also attributes the downtrend in urea sales to organic farming and its growing prevalence in high fertilizer usage states of Andhra Pradesh and Telangana. With other states such as Odisha also encouraging organic farming and growing realization among farmers about its benefits, it will not be a surprise if DAP (diammonium phosphate), another widely used fertilizer, also tracks the urea sales trends, says Ramanjaneyulu.

The transformation, if it is indeed taking place, will benefit the government first. Subsidy outflow will fall, a positive from the fiscal perspective, says K. Ravichandran, senior vice president and group head (corporate ratings) at Icra Ltd.

However, the trends pose a tricky future for fertilizer producers. Jhawar of Investec Capital says the share of organic farming in India is quite low at present. Even the most developed countries have less than 10% of their total agriculture land under organic farming. In fact, increased awareness among farmers should bode well for NPK (nitrogen, phosphorus, potassium) fertilizers, which provide balanced nutrients. Also with India still dependent on imports, there is a likelihood that imports could come down. This means there will not be a dramatic change in the fortunes of the domestic fertilizer companies in the near term.

But the culmination of the earlier mentioned factors—neem coating and the resultant reduction in sales, and shift to organic farming—raises questions about the incremental demand growth and the long-term growth trajectory of the sector, says Jhawar.

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