Proceed with urea price decontrol

If there is one sector that has suffered from ‘policy paralysis' for decades, it is urea, a fertiliser that is a dominant source of ‘nitrogen', the primary nutrient needed to grow crops.

Ever since economic liberalisation started in 1991, reforms in urea have been stymied, even as phosphorous and potash (P & K) were decontrolled in 1992. For the latter, a fairly efficient and transparent system of ‘nutrient-based' subsidy regime is in place, which gives ‘uniform' subsidy per unit of N, P & K to all producers.

In contrast, MRP of urea continues to be controlled at a ‘uniform' level all across India, and has been more or less stagnant. Thus, the price now at Rs 5,310 per tonne, is approximately 10 per cent higher than what it was in 2002.

On the other hand, the cost of production is substantially higher and increasing with time. The Government reimburses differential as subsidy to producers. The subsidy amount varies from unit to unit, depending on its production cost.

OLD WINE IN NEW BOTTLE

Initially, subsidy was given under RPS (retention price scheme). In 1997, modified RPS involving major changes in costing norms came into vogue. From 2003 till date, subsidy is given under NPS (new price scheme).

Under all these dispensations, cost/subsidy given is unit-specific. The form may have changed, but the fundamentals remained unaltered: a typical case of ‘old wine in new bottle'.

RPS/NPS doesn't give incentive to units that perform efficiently. Units that don't perform well or make inefficient choices in regard to feedstock/fuel, other inputs and their sourcing aren't penalised.

Almost frozen MRP ensured that subsidy payments only move ‘northward'. Those who created and conceptualised RPS hadn't contemplated such a scenario. In their vision, this was intended to be ‘subsidy neutral'.

They believed that there would be units with RP lower than MRP (then, GSFC, Baroda, HFC, Namrup & IFFCO, Kalol). Surplus accruing from them would be used to subsidise units whose RP was higher than MRP.

This would have worked if only MRP had been raised, albeit gradually. But that was never to be! Even as production cost increased steeply, selling price remained more or less stagnant. The net result was all units were receiving subsidy on an escalating scale.

Caught between a rising subsidy bill and fiscal compulsions, the Government was prompted to ‘cut corners' while processing subsidy claims. As a result, producers suffered under-recoveries, thus squeezing margins. Even if a unit did well, there was no guarantee that it would make a profit!

NO NEW INVESTMENT

The uncertain policy environment has led to a situation whereby, since 1997, there has been no new investment in capacity addition in urea. This has led to an increasing dependence on imports (6.5 million tonnes of total demand of nearly 28 million tonnes).

Ironically, imported urea is subsidised to a much higher degree than indigenous urea. Depending on fuel used for production, subsidy on domestic urea is in the 60-75 per cent range. On the other hand, subsidy on imported urea is a high of 90 per cent.

Recently, an Empowered GoM had given the green signal for deregulating the MRP of urea, and putting in place NBS on similar lines, as for decontrolled P & K fertilisers. And yet, the Government's dithering on this is palpable!

This long-pending reform has the potential to rectify the malaise. Removing control on urea MRP will yield a huge saving in subsidy, depending on where the price settles. Thus, a 40 per cent increase will save around Rs 6,000 crore per annum.

In many areas, farmers are already paying Rs 400 per 50-kg bag of urea, or Rs 8,000 per tonne. A low MRP in India also leads to smuggling to neighbouring countries, viz., Nepal and Bangladesh, where prices are much higher.

All this will be checked when MRP is brought up to realistic levels.

GAS SECTOR REFORMS TOO

The current artificially-low price has led to excessive use of urea vis-à-vis P & K fertilisers, whose MRP has shot up, triggered by an increase in international price of DAP, MOP and raw materials. The resulting imbalance is neither good for yield nor for soil health!

Urea price deregulation will bring much-needed price parity, thus restoring balance. A bigger gain will be to release farmers from the age-old syndrome of ‘identifying fertiliser with urea use only' and prompt them to use nutrients based on what the soil needs.

Certainty in the policy environment will encourage investment in setting up new capacity. It will unleash forces of competition and better ways of doing things. Under the present dispensation, this is virtually non-existent.

Today, due to subsidy/fiscal compulsions, gas prices to urea units have to be kept at a low of around $ 4 per Million British Thermal Units (MBTU). Given the gas supply and cost scenario, this price is unsustainable. Reforms in urea will help rational decision-making in the gas sector, too.

NBS for urea is clearly beneficial for all stakeholders. There mustn't be any fear of impact on production cost of farm produce, as share of fertiliser is just approximately 9 per cent. So what is preventing policymakers?