Finance ministry for freeing urea prices

Finance ministry for freeing urea prices

New Delhi: The finance ministry has recommended to the department of fertilizers (DoF) that urea prices, instead of remaining under the new pricing scheme (NPS), should be decontrolled and brought under a modified nutrient-based subsidy (NBS) regime.

The department of expenditure (DoE) said this in a detailed note to the DoF in October. Mint has reviewed the note.

“This department (DoE) is in in-principle agreement with the observations of the Planning Commission that the extension of the existing policy for urea (as modified NPS-III) for yet another three years is highly retrograde. Urea should be brought under NBS policy immediately, with high cost non-gas units being given an extra minimum fixed subsidy, if necessary," the note says. “For the gas-based plants, producing more than 82% of the indigenous urea, some form of NBS may be brought w.e.f (with effect from) 1 April, 2011."

The DoE has proposed a cross-subsidy model for the modified NBS for urea, which, it says “will provide subsidy based on import price parity (IPP), but seeks to extract some benefits for the government by expecting the urea manufacturers to provide more than their manufacturing capacity and reduce the import bill".

India’s annual urea consumption is about 27 million tonnes, while local production stands at just 22 mt. The rest is imported.

As a first step, the DoE has recommended that the import of urea may be decanalised, that is, all restrictions on who can import should be removed. At present only three government-owned entities—Minerals and Metals Trading Corporation of India Ltd. (MMTC), State Trading Corporation of India Ltd (STC) and Indian Potash Ltd (IPL)—import urea.

This, if implemented, would let private players import urea under an open license.

The note further says that to “provide a level playing field" for all urea units, a uniform energy rate can be achieved by “pooling the energy" at the Fertilizer Industry Coordination Committee (FICC) level. “Units with energy rate higher than weighted average industry rate shall be compensated by FICC, while recovery can be made from units paying lower rate than weighted average. As a result, the entire industry will receive energy at uniform rate."

The FICC, which has top bureaucrats as its members, monitors the NPS regime.

The DoE has suggested that those units which “agree to import 20% of their domestic manufacturing capacity from the international market at the prevailing IPP", should be given 80-85% of the IPP on their domestic production.

“In this model, while industry will gain through higher subsidy by way of IPP-linked concessions, the burden on the government will be minimal due to cross subsidization of its products," the note says.

The DoE has recommended that the government should “recover" $11 (Rs497.2) per tonne from those units that do not want to import urea.

The note has suggested that the maximum retail price (MRP) of urea should be market-determined, with a target MRP of Rs5,700 per tonne, an increase of 7.3% from the presently stipulated MRP of Rs5,310.

According to the note, if the IPP rate is assumed at $300 per tonne (at an exchange rate of Rs46 per US dollar), and 83% IPP is recognized on domestic production, the total additional subsidy outgo would be to the tune of Rs1,545 crore.

The DoE, however, estimates that its scheme to cross-subsidize imports would result in a saving of Rs751 crore, thereby reducing the additional burden to the tune of Rs794 crore. The DoE has recommended that the government should set a “firm sunset clause ending on 31 March 2013" to force the non-gas units to convert into gas-based plants.

During the intervening period, it recommends that these units “may be provided concessions based on existing regime". The note comes amid growing differences between the two departments on decontrolling urea pricing. While the finance ministry has been pushing for decontrol, the majority view in the DoF is opposed to the idea.

Mint first reported on 18 October that these differences had been holding up the implementation of the fourth stage of the new pricing scheme (NPS-IV), which was due on 1 October.

On the same day, following Mint’s story, the fertilizer secretary Sutanu Behuria had said that instead of NPS-IV, the DoF was looking to implement a “modified NPS-III". The finance ministry officials dealing with the subject could not be reached for comment.