Price controls on new private plants may go

Price controls on new private plants may go

New Delhi: The government hopes to take the first steps towards deregulating the sector with a new fertilizer investment policy which will, for the first time, permit setting up of privately-owned plants that will not be bound by current price controls.

“The new units will be outside the subsidy regime. They will be free to produce in whichever manner they want without any governmental interference," said a senior fertilizer ministry official, who did not wish to be identified.

In addition to creating new production capacity, the government sees this as a way to reduce imports and the growing subsidy burden that is primarily driven by spiralling import prices of fertilizers and input costs.

Currently, the government fixes the price at which a producer sells to the government as well as the maximum retail price. The difference is the amount of subsidy borne by the government.

“Under the new policy, government will not fix the producer’s price for the new units. Each new unit will be free to decide the price at which it wants to sell its product. However, the domestic fertilizer prices for the farmers will continue to be regulated. In the new set-up, if the government finds that the new units are providing fertilizers at or below the import parity price, then the government will buy from these units instead of importing," explained the same official.

Apart from burdening the exchequer, imports also pose considerable logistical strain. “Timely availability of fertilizers is critical to raising productivity. Inadequate availability of space at ports and delays in transportation from the ports to the interiors cause huge losses in productivity. Increased domestic capacity will resolve the situation to a great extent," the official said.

The official further said that the new policy would not place any cap on foreign direct investment.

“Anybody and everybody would be welcome to invest. The new unit will not be forced to sell in the domestic market and will be free to export," said the official.

However, the government will also not give any commitment to buy from these units, the official clarified.

The government’s subsidy burden has grown at an alarming rate over the last four years and the main contributory factor is the rising cost of imports. Subsidy payments have more than doubled in this period. While it was Rs15,879 crore in 2004-05, data provided by the government reveal that the Centre’s spending in the current fiscal at the end of the first nine months was projected at Rs37,451 crore.

The subsidy for fertilizer imports at the start of the current fiscal year was Rs2,704 crore, about 12% of the total fertilizer subsidy bill in 2007-08. However, due to an increase in prices, the share of subsidies accruing on fertilizer imports has more than doubled to 25%.

Imports constitute significant proportions of the three main subsidised fertilizers. While muriate of potash is fully imported, the share of imports was around 15-20% for urea and around 30-35% for diammonium phosphate (DAP). Since 2002, import prices of these three fertilizers have almost doubled.

The feedstock prices, which account for nearly 80% of the production costs, have shot up by 264% for naphtha, 179% for furnace oil and 221% for liquefied natural gas over the last 10 years while urea prices have risen by 32%.

Unlike a third of the existing units, which are based on naphtha and furnace oil, the new facilities will use gas as feedstock. Not only is gas cheaper, it is also more easily available.

The lack of price reforms and delays in payment of subsidy dues have dampened investment sentiment. “The trend is very depressing. The last greenfield investment in urea was done in 1995 and the last DAP plant was (set up) in 2000. Nobody would want to enter a sector which places a cap on the profits one can make," said a senior official of the Fertilizer Association of India, who also did not wish to be identified.

However, even the new policy proposals may fail to lure fresh investments. “A new plant may cost anywhere between Rs3,500 crore and Rs4,000 crore and will take a minimum of 36 months to operationalize. No one will make such a substantial investment if the government does not commit to buy a certain minimum amount of fertilizers from the new plants," said the association official.