Why no ‘Make in India’ for urea?

In April 2014, the UPA government in its last days, cut off the lifeline of three urea plants. It gave a final push to a ten-year-old trend of replacing domestic urea production with imports. The government-owned Madras Fertilisers, and the private sector units SPIC and MCF closed down six months later because the Department of Fertiliser (DoF) under the Modi Government went ahead with the UPA proposal.

The above closure would result in additional imports of 20,000 tonnes of fertiliser per annum.

The naphtha feedstock consumed by the fertiliser units was being domestically produced by the nearby Chennai Petroleum Corporation Ltd (CPCL). CPCL and IOC units acting as suppliers to these urea plants were adversely affected.

The production cost of urea at MFL was ₹46,000 per MT at the time of its closure which, though higher than domestically produced gas based urea, was lower than the landed price of imported fertiliser.

Though MFL had changed over to gas-based production as per the direction of the DOF it could not get gas due to delays by Government agencies in laying gas pipelines.

In 2004, when the UPA came to power India was totally self sufficient in production of urea with no imports. The subsidy on locally produced urea was ₹8521 crore that year. Today, India imports over a quarter of the urea it uses. The imported urea is not cheap. It is, in fact, far more expensive than the urea produced by the naphtha based plants but is heavily subsidised by the Finance Ministry. The subsidy on urea imports was ₹18,016 crore in 2012-13.

After the UPA came to power it changed the policy to import and subsidise urea. A key beneficiary of this import policy was Indian Potash Limited IPL, a small private sector company, a third of whose shares were held by Iffco, one of the largest producers of urea. Iffco had become a privately owned co-operative after it returned the equity invested by the central government of ₹157 crore, permitted under the amended Multi Co-operative Society Act in 2003. IPL was also privately owned but surprisingly enjoys rights given to public sector importers MMTC and STC.

In May 2007, the Secretary, Department of Fertiliser (DoF), asked States to give 100 per cent advance to IPL to import fertilisers despite it being a privately owned company. IPL was bestowed interest free advances of several thousand crore and its balance sheet showed a three fold rise of loan funds to ₹2030 crore.

The debt equity ratio of IPL with a meagre equity base of ₹14.3 crores shot up to over 15:1 the next year but it was still given bank guarantees by public sector banks to import fertiliser as a result of which its turnover touched ₹32,154 crores in 2008-09 nearly three times the previous year and twenty times its revenue before the UPA tweaked the fertiliser import policy in 2004.

As per the CAG’s performance audit, IPL imported 18 lakh tonnes of urea between July 2008 to January 2009 on government account at prices of up to $850 /tonne.

As India became the largest importer globally it spiked international prices of urea that had remained dormant for the last twenty years. FOB Urea prices which were $280.75 per tonne in January 2007 rose to $403.75 in January 2008 and $815 in August 2008 as per Department of Fertilisers’ Annual Report of 2008-09.

The imports by IPL were at prohibitively high prices but were subsidised by the Finance Ministry. As a matter of fact imported urea continues to be heavily subsidised . The subsidy on imported urea amounted to ₹17,061 crore, higher than the ₹16796 crore subsidy for domestically produced urea, according to the 2011-12 annual report of the DoF.

This is despite the fact that imports at ₹44.92 lakh MT was a just third of the domestic production of 122.59 lakh tonnes of the nitrogenous fertiliser.

Calculations show that subsidy per tonne that year on the imported nutrient was ₹37,980 as against 13,700 on the indigenously produced product.

In first two months of the year 2014 urea imports doubled to 14.9 lakh tonnes against 6.56 lakh tonnes in the April-May period of last year. This closure of naphtha based urea plants in South India will further boost imports.

The higher cost of imports will again be subsidised by the Finance Ministry. The subsidy is given not only on imported nutrient but on port handling, bagging and transporting the product. ‘Made in India’ will once again remain a politician’s paper promise.

The writer is a journalist and author of ‘ Neta, Babu and Subsidy’