Decision on decontrolling urea prices unlikely in Union budget

Decision on decontrolling urea prices unlikely in Union budget

New Delhi: Finance minister Pranab Mukherjee may be unable to include a decision on freeing urea prices in Monday’s budget, with the Planning Commission and the department of fertilizers (DoF) unable to agree on a pricing model that eliminates subsidies.

The Planning Commission has again suggested to DoF that the model it had drawn up be adopted with some changes, according to two people with direct knowledge of the matter. DoF had earlier rejected the Planning Commission’s suggestion as “unworkable".

In any case, the group of ministers on urea pricing headed by Mukherjee is unlikely to meet before budget day.

“At best, the finance minister will express an intent to decontrol urea in his budget speech," said a senior DoF official on condition of anonymity. “The price model and other details will, however, be finalized only after that."

The Planning Commission has now proposed that if the government pools gas at the level of the fertilizer industry coordination committee (FICC) and sells it at a uniform weighted average price, it could then redistribute the subsidy among profit and loss-making units by re-determining the cost of production of urea for all the units.

This would be applicable in the event the government decides to decontrol urea and bring it under the nutrient-based subsidy (NBS). As urea is a subsidized product, the government determines the cost of production for each unit on the basis of fixed and viable input costs, and then fixes the subsidy payout due to each unit.

“This, the Planning Commission thinks, could cushion the loss-making units, while impacting the profit-making ones only marginally," said the second person cited above. FICC comprises a group of senior government officials who oversee urea pricing.

In case the government pools gas at the FICC level, units of companies such as Tata Chemicals Ltd and Chambal Fertilisers and Chemicals Ltd, which are at a considerable distance from the coast, would have to buy gas at a higher cost than units of firms such as Rashtriya Chemicals and Fertilizers Ltd, Nagarjuna Fertilizers and Chemicals Ltd and Gujarat State Fertilizers and Chemicals Ltd due to the difference in landed cost of the fuel on account of geography, analysts said. “Having said that, since gas is a pass-through item, such a difference in procurement cost would have no impact on these companies," said Tarun Surana of Sunidhi Securities and Finance Ltd. Gas is called a “pass-through" item since the government subsidizes plants on the entire cost of gas.

Surana added, however, that since some plants score over the rest on efficiency norms, more efficient units will take a marginal hit over the others. Of the savings that companies make from efficiency, the government takes a 65% share, leaving the firm with 35%.