The fertiliser industry has been instrumental in making India self-sufficient in food and agricultural produce. While the sector plays a vital role, it continues to struggle with limited investments. Additionally, this sector is frequently criticised for straining the country’s fiscal deficit with rising subsidy bills.
The rising subsidy bill with no significant increase in agriculture productivity indicates that inefficiencies in the mechanism are impacting farmers, fertiliser manufacturers, as well as taxpayers and consumers. While it is important to analyse the impact of subsidy mechanism, it is time to develop a long-term vision that makes the sector sustainable and engenders renewed vigour for investments that will make Indian firms globally competitive.
The current subsidy payment regime involves compensating the manufacturer for the difference between the government’s regulated fixed MRP and the manufacturer’s production cost. However, production costs can vary dramatically between manufacturers depending on the vintage of the plant and machinery, upgradation of technology, improving the competency of people and so on. India produces about 22 mt urea per year. The energy cost accounts for 80 per cent of the cost of production. Therefore, survival of the industry depends on improvement in energy efficiency.
The government can play a vital role here by incentivising energy efficiency in production. If the regulatory and subsidy mechanism is developed which suits investment in maintaining operational efficiency then companies currently hesitant to invest in refurbishing and modernising their plants will be encouraged to invest. This will in turn help production in a more energy efficient way and government support in this scenario through effective subsidisation will help the company’s profitability and sustainability.
India lacks adequate energy resources and is heavily dependent on import of all primary energy resources, be it crude oil, coal or natural gas. The Krishna Godavari Basin is the only source for natural gas in India and supplies fuel to urea manufacturers, liquefied petroleum gas (LPG) plants, power stations and city gas distribution (CGD) projects. In addition to limited availability, the government is challenged with balancing the needs of the sectors that depend on natural gas and those of fertiliser manufacturers. It is, therefore, important that every cubic metre of gas is saved to reduce import of RLNG. Hence, improving the operational efficiency of fertiliser manufacturers is vital so that every bit of energy saved is utilised in the right manner to produce more output.
If the average efficiency of fertiliser manufacturers is improved, it will result in minimal use of feedstock to produce higher output. The government is paying manufacturers a gas cost at widely varying gas consumption at preset energy norms of 5.4 gcal/t urea to 10.22gcal/t urea. Encouraging manufacturers to become more energy efficient will boost domestic manufacturing which in turn, will eventually help us reduce dependence on fertiliser imports which is eating into the fertiliser subsidy bills. Further, per unit cost of production will go down significantly. All these factors will play a major role in reducing fiscal deficit.
Conducive environmentThe fertiliser industry presents one of the most energy intensive sectors within the Indian economy and hence is vital in the context of both local and global environmental discussions. Increases in productivity through the adoption of more efficient and cleaner technologies in manufacturing fertiliser will be most effective in merging economic, environmental, and social development objectives. Through improvement in operational efficiency, it is possible to reduce GHG emissions, air pollution, impacts to surface and ground waters.
In order to revive the industry and make the subsidy mechanism effective, the government would need to make the sector attractive for investors and create a conducive regulatory environment that propels technological advancements and incentivises companies that comply with environment conservation norms and focus on efficiency. Removing price controls and incentivizing efficient producers may lead to greater operational efficiency, investments in technological upgradation, and capacity expansion. Inclusion of urea under the Nutrient-Based Subsidy policy can bring balanced use and help address the issue of soil degradation.
The global industry has placed significant emphasis on making plants more efficient while advancing fertiliser producing technology. It is time we also develop a similar blueprint. Technological advancement in agricultural inputs will hence play a critical role in advancing India’s fertiliser and agriculture industries, but the policy environment also needs to focus on rewarding the energy efficient players rather than punishing them.
The writer is the managing director of Tata Chemicals Ltd