Urea prices are set to soar by as much as 40 per cent. An inter-ministerial consultation process is expected to begin next week, before the Cabinet takes a final call.

The move comes even as the Government has not been able to formulate a policy for deregulation of urea prices, despite approval from an Empowered Group of Ministers.

A person familiar with this development told Business Line , “With international prices going up, it has necessitated an increase in the maximum retail price for urea. This will help domestic companies to get better returns and invest further.”

The urea price was last revised on April 1, 2010, from Rs 4,830 a tonne to Rs 5,310 a tonne. He claimed that such a move is likely to get support from the Finance Ministry as this will reduce its subsidy burden. On apprehensions of an adverse impact on inflation, the source pointed out that the contribution of fertiliser in the cost of production for farm output has come down significantly over the past few years.

In fact, the industry claims that the cost of fertiliser in the overall cost of agriculture produce has come down from 11 per cent to 9 per cent.

Urea is the only controlled fertiliser, where the difference between the cost of production of urea as assessed by Fertiliser Industry Coordination Committee (known as the retention price) and the statutorily fixed sale price is paid as subsidy under the Retention Price-cum Subsidy Scheme.

Such a scheme ensures uniform sale price to the farmers besides a reasonable return (12 per cent) on capital investment to the manufacturers.

According to various estimates by the Government and the industry, subsidy on urea is in the 60-75 per cent range, depending on the fuel used for production. On the other hand, subsidy on imported urea has gone up to 90 per cent, industry sources claimed.

At present, of the total demand of nearly 28 million tonnes, 21.5-22 million tonnes are met through domestic sources.

Mr U.S. Awasthi, CEO, IFFCO, said that the existing price level is unsustainable and is hurting investment prospects. No new investment in capacity addition in urea has taken place since 1997. He said the price revision will stop indiscriminate use of urea which, in turn, is good for the soil and ground water.

He also believed that a 40 per cent price hike is justified as farmers, in any case, pay Rs 400 per 50-kg bag in many places because of various reasons, including middle-men. A 40 per cent hike would take the price to nearly Rs 7,500, which is close to the current actual market price, he added.

Shishir.s@thehindu.co.in

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