‘In the fertilizer industry, the manufacturers are making losses’

‘In the fertilizer industry, the manufacturers are making losses’

Even while the rest of the economy touches record highs, there has been no new investment in the fertilizer industry in more than a decade. With demand continuing to rise, the mismatch between production and consumption of fertilizers is increasingly being met through imports.

However, now the government seems more determined than ever to reverse the industry’s fortunes. Steps planned include a new investment policy and an overhaul of the subsidy regime.

To understand the industry’s perspective on the existing issues as well as on the proposed changes,?Mint?spoke?to B.D. Sinha, managing director, Krishak Bharti Cooperative Ltd (Kribhco), a multistate cooperative and one of the leading fertilizer manufacturers in the country.

Agricultural growth has fluctuated over the past few years. How far has the unbalanced use of fertilizers and the consequent decline in the soil response ratio (or soil fatigue) contributed to this trend?

Agricultural growth depends not just on fertilizers but also on quality seeds and proper irrigation. So unless the three inputs are provided together, agriculture will not grow fast. Balanced fertilizer use is important. It is true that in India there is a mismatch of ratio of nitrogen, phosphate and potassium, which has to be restored. That’s why now there is an increasing awareness about applying the right quantity of the different nutrients depending on the soil requirement.

But this is a complex procedure. Unless we have proper soil testing facilities and unless the farmers are encouraged to get their soil tested, they will not know the exact requirement of the soil. For example, if the soil already has nitrogen and you put more nitrogen, then it is not a surprise that soil will not respond.

However, even the unbalanced use of fertilizers results in increased productivity as against not applying fertilizers at all. Globally, we are way behind the application of nitrogenous fertilizers per hectare. So, we cannot wait till we apply the fertilizers in the proper ratios. Not applying fertilizers will sharply reduce our productivity. Whatever is being applied is yielding results. Farmers are not fools to invest money in fertilizers if they don’t get the return.

On the one hand we lag behind the world in the per hectare use of fertilizers, yet our productivity is not registering a significant growth. Moreover, as some studies have suggested, gross overuse of any one fertilizer could permanently damage the soil productivity.

I am quite hopeful that some solution would be found. We as manufacturers of nitrogenous fertilizer have a limited role. Being in the cooperative sector, we run many programmes to educate farmers across the country. We encourage them to go for soil testing. But this needs to be done at the national level.

The problem is that farmers have a mental block that only application of urea will give the desired yield. This needs to be changed.

Is it true that the farmer chooses urea primarily because it is heavily subsidized and hence cheaper than other fertilizers?

Yes, I would agree that urea is a cheap product and if a farmer opts for some other fertilizer, he would have to shell out more money.

In that sense, does it mean that the government subsidy to certain specific products, irrespective of their effectiveness in the past, today holds back the farmer from applying the right nutrients in the right quantity?

Yes, I would agree with you. Before analysing the efficacy of fertilizer, the farmer first looks at the money he needs to pay for it. And since urea is subsidized, he prefers it.

But availability is also a reason. Sometimes the farmers use urea because, say, DAP (di-ammonium phosphate) is not available.

The government is considering a shift to a nutrient-based subsidy. Do you favour such a move?

I totally agree.

What is the crucial benefit that might accrue to farmers because of the nutrient-based subsidy?

It will encourage the production of other types of fertilizers, too. At present, a manufacturer does not produce the whole array of fertilizer products because often there is no profit to be made. There are many advantages if the government subsidizes the nutrient content in a fertilizer product. Manufacturers will produce more diverse products and farmers will feel encouraged to apply different fertilizers leading to balanced fertilizer use. In fact, the government is also talking about the micro-nutrients.

Now this debate has reached a point where a decision must be taken to ensure agricultural growth. Nutrient-based subsidy will have an immediate impact. But my personal view is that, balanced fertilizer use notwithstanding, unless we do something about quality seeds, agricultural productivity will not improve.

Is Kribhco doing anything about it?

We are processing quality seeds and making them available to the farmer. However, compared with the national consumption level, their production very low. We have 10 plants at different locations where we process seeds and make them available to the farmers. Our seeds are certified and in big demand. Quality seeds immediately add to productivity. The government has to be conscious about seeds at a national level. We plan to have more plants.

A closely related issue is the provision of direct subsidy to the farmers. Do you favour such a shift?

It is a very ticklish question. There is a sharp division of opinion on the issue of direct subsidy. My personal view is that, as the manufacturer of the cheapest urea in the country, a shift to direct subsidy will benefit me the most. But we are concerned about the farmer’s welfare and the country’s agricultural productivity. The administration of direct subsidy may be a major problem. I feel if you give the subsidy as cash to the farmer, then his priority may change. Instead of buying fertilizers he might use it for some other purpose. At least in the present regime, he gets to buy fertilizers at an affordable price.

There have been suggestions to hand smart cards, based on the RFID (radio frequency identification) technology, to farmers for administering the subsidy directly. Is this practical?

I don’t know. This has been tried out in the petroleum sector. But fertilizers go to the remotest places, least exposed to technology. So we have to think?of them, too, because fertilizers are not used in metros. So some very foolproof method has to be devised before one thinks of direct subsidy.

But many believe that the only way to administer the nutrient-based subsidy is by directly providing the subsidy to farmers.

No, I do not agree. Nutrient-based subsidy can be provided through the indirect subsidy route also. But if at all one has to experiment, then let there be a pilot experimentation, say, in one district of each state and see the results. We cannot just give the subsidy and close our eyes. We must verify whether the farmer is benefiting from it or not.

Those supporting a shift to the direct subsidy regime also cite some studies which claim that only a part of the money spent by the government on subsidy actually reaches the farmers. In turn, their claim is that manufacturers favour indirect subsidy regime because it serves their interest. Do you agree?

I totally disagree. Had this system been so lucrative for manufacturers, then there was no reason why no new capacity was added in this country for more than a decade. There is all-round growth in the economy, every sector is booming. Had the fertilizer sector been so lucrative, the entrepreneurs of this country would not have ignored it. You don’t have to be a rocket scientist to understand that. People are waiting for the government to come out with a policy where there is some return on investment. In fact, today manufacturers are making losses.

If the manufacturers were benefiting at the expense of the farmer, then people would not have closed their eyes to this sector. The truth is, as things stand today, it is not an attractive sector. And that is why the government is trying, very earnestly, to come up with an investor-friendly policy, and we are waiting for that.

A crucial aspect of any new investment would be the price of gas. The government has admitted that if the delivered price of gas is above $5 (about Rs200) per million British thermal unit, the viability of fertilizers firms may be affected adversely. However, according to industry estimates, this price could go up to $6 or more. Is that a concern, irrespective of what the new investment policy might be?

That will not be the concern of the investor. It will be the concern of the government because that cost will be passed on to the government. So, in effect, it will further jack up the subsidy burden; $5 is a reasonable price. If there is no check on the price, it can have serious consequences. But a plant’s life is 15-20 years, so the crucial thing is the long-term price. Today, we are talking about the price, but not about the period.

How do you respond to the bonds that have been floated?

I still don’t know the exact terms and conditions of the bonds so I cannot say how the bankers will react to these bonds. In fact, even I am anxious to know.