Govt assessing impact on exchequer of freeing non-urea fertilizer prices

Govt assessing impact on exchequer of freeing non-urea fertilizer prices

New Delhi: The government, which subsidizes use of fertilizers by Indian farmers, is assessing the impact on the exchequer of allowing companies to set prices of non-urea fertilizers before it decides on doing the same for urea.

A draft policy to free prices of urea, which accounts for more than half the fertilizer consumption in India, is awaiting the assent of fertilizer minister M.K. Alagiri, after which it will be sent to the Cabinet for approval.

The assessment comes after an 11 October internal note from Alagiri seeking an evaluation. Mint has reviewed the note.

Controls on the pricing of non-urea fertilizers, including di-ammonium phosphate (DAP), muriate of potash and complex fertilizers, were removed in April 2010. A department of fertilizers official said preliminary data available for DAP show that in the year to 31 March the government is likely to pay 1,200-1,500 crore more as subsidy for the fertilizer over what it would have paid if it controlled the prices. Data for other non-urea fertilizers have not been calculated.

Domestic demand for DAP stands at 11-12 million tonnes (mt) a year, the second-highest after urea. While 6-6.5 mt of DAP is imported, the rest is produced locally.

In the case of non-urea fertilizers, the government and the industry reached an understanding that manufacturers would not raise the maximum retail price (MRP) of such fertilizers till April 2011 by more than 10% over the government-mandated price in the year earlier. Despite this, in 2010-11, the non-urea fertilizer subsidy bill rose by 8,000 crore from the previous fiscal year, primarily on account of increased demand.

While in April 2010, DAP was sold at a government-mandated MRP of 9,350 a tonne, the current MRP hovers at the 18,100 a tonne-mark. The current subsidy on DAP is 19,673 a tonne.

Analysts attribute the rise to soaring DAP prices in the international market; meanwhile, companies have pegged the MRP to international spot rates, thereby keeping retail prices artificially high. In the year to September, the price of DAP in the international market increased by 22.4% to around $670 a tonne in the spot market.

“Companies this year are importing DAP on a long contract price of $620 per tonne, but instead of fixing the MRP to their contracting price, they are fixing it on the prevailing spot price," said a second official in the fertilizer department. He added that companies are netting the $50 difference between the long-term contract and spot prices as profit.

Neither official wished to be identified.

“One of the basic objectives behind price deregulation was that it would bring down the subsidy bill," said the second official. “The fact that for the second year in a row we could see an increase in non-urea fertilizer subsidy means that this objective has clearly not been met."

The officials said that while deregulation has ensured that companies import enough quantities of DAP and muriate of potash to meet local demand, a runaway increase in the retail price, especially in the case of DAP, has meant that the farmer has been affected badly.

A former fertilizer ministry official, who was closely associated with the deregulation policy implemented in April 2010, agreed.

“The deregulation policy did not have any checks and balances in place, so the companies have run amok with prices," he said, asking not to be identified. “The government made a cardinal mistake in not setting up a regulator for the fertilizer sector. If urea prices are deregulated, such a regulator must be put in place."

An executive with the Fertilizer Association of India, an industry lobby group, disputes that companies are artificially keeping prices high. “In the last three or four months, companies have not been able to enter into long-term contracts and are having to buy DAP on spot," he said, asking not to be identified.

He blamed international sellers for refusing to enter into long-term contracts. “DAP suppliers have realized that there is growing demand in India and that companies now have freedom in fixing the MRP. So, of late, they only want to sell on spot rates and do not want to enter long-term contracts."

Sudhir Panwar, a professor at the University of Lucknow and an analyst on farm issues, said a near doubling of DAP prices has led many farmers to cut back on fertilizer usage.

“In some cases, the cost of input has gone up by as much as 34%, primarily because of increase in input costs and farmers in several districts of Uttar Pradesh are thinking of declaring a crop holiday," he said. “The minimum support price that the government offers on crops is simply not enough to meet input costs."

A crop holiday refers to a situation in which a specific crop is not grown during a season in a particular region.