The government should remove the control on urea and stop subsidizing manufacturers; instead, the government can give it directly to farmers
Launch of the revival project – annual production capacity of 1.27 million tonnes (MT) of neem coated urea – of Hindustan Urvarakand Rasayan, a public sector joint venture of Coal India Limited, NTPC, Indian Oil Corporation and FCIL – in Gorakhpur on December 7, Prime Minister Narendra Modi made the following four observations: Despite the sharp increase in international fertilizer prices during the current year, the government has ensured that farmers do not have to pay more; The 100 percent neem coating helped curb urea diversion to non-agricultural / industrial uses; Gorakhpur and four other stimulus projects currently under implementation will add six million tonnes to the existing annual urea production capacity of 25 MT, thereby reducing dependence on its imports; and, soil health maps have helped farmers to use fertilizers as needed by the soil, thus helping to reduce the imbalance in use.
The above observations may seem to indicate that all is well in the fertilizer industry in India. However, we need a reality check to find out where exactly we are at.
The Union government controls the maximum retail price of urea at a low level, unrelated to the cost of production and distribution, which is much higher. Manufacturers are reimbursed for lost sales resulting from the sale in the form of a subsidy on a “unit specific” basis under the new pricing system. In addition, they get reimbursed for travel costs from the factory / port to the retailer under a uniform freight policy. Invariably, the MRP is kept unchanged (today’s price is the same as in 2002) even though all cost increases are absorbed by the increase in the subsidy.
In the case of phosphate and potassium (P&K) fertilizers, the government sets a “uniform” subsidy per nutrient for all manufacturers under the nutrient-based regime. Manufacturers are free to set the MRP, but are expected to reflect the subsidy there. They also get reimbursement for travel costs (but only up to the head of the line). In the past, the government had consistently kept the subsidy unchanged, even though the increased cost resulted in ever higher MRP.
Existing systems allow the Center to set the MRP of urea and complex P&K fertilizers to the expected level. If he exercises direct control over the former as well as over the non-controlled latter, he can achieve the same result by adjusting the subsidy rate.
In the current year, from October 1, the price of domestic natural gas (it supplies nearly two-thirds of the urea industry’s needs) has increased from $ 1.79 per million. British thermal units (mBtu) at $ 2.9 per mBtu and is expected to reach $ 5.93 per mBtu from April 2022 and $ 7.65 per mBtu from October 2022. The price of imported LNG (it provides the remaining third) fell from around $ 5.5 per mBtu in April to US $ 14 per mBtu and is expected to increase to $ 20 per mBtu plus from April 2022.
In the segment without urea, the price increase is even higher. The current price of imported ammonium phosphate (DAP) is $ 630 per tonne, $ 300 more than last year. The price of phosphoric acid (raw material or RM used in making DAP) is around $ 1,000 per tonne, up $ 375 while that of ammonia (another RM for making DAP) is $ 670 per tonne, up from $ 470. The price of muriate of potash at $ 400 per tonne is $ 170 higher.
While, in the case of urea, the increase in production costs due to the rising gas price is “automatically” absorbed by a higher subsidy ensuring that its MRP remains unchanged, for P&K fertilizers as well, the Modi government has significantly increased the subsidy rate (on the DAP from Rs 10,000 per tonne last year to Rs 32,760 per tonne current) to ensure its MRP remains at Rs 24,000 per tonne from last year . However, it came at a cost to the public purse.
During 2021-22, the Center will need to spend approximately Rs 58,000 crore more (Rs 30,000 crore on P&K fertilizers and Rs 28,000 crore on urea) in addition to the budget allocation of 80,000. Rs crore (Rs 21,000 crore on P&K and Rs 59,000 crore on urea). It is able to absorb such a gargantuan subsidy expenditure – a total of Rs 138,000 crore – due to a very liberal budget deficit target of 6.8% of GDP (Rs 15,000,000 in absolute terms). This room for maneuver will not be available when fiscal tightening returns.
A 100% neem coating, commissioned in 2016, aimed to eliminate urea diversion which, at that time, was estimated to be around 30%. Out of a total urea sale of 30 MT in 2015-16, this represented 9 MT. This implies that the urea used by farmers or the actual demand that year was only 21 MT. The use of urea coated with neem also leads to an improvement in its efficiency of use. Assuming a 20 percent increase in efficiency, farmers could manage with 16.8 MT of urea (21 × 0.8) to achieve the same level of agricultural production. In other words, consumption could be even lower at 16.8 or around 17 MT.
If things had worked as Modi promised, even assuming constant growth of five percent per year, consumption in 2020-21 would have been 22 MT. But, the actual for the year was significantly higher at 35 MT. This means that neither the diversion has stopped nor that there has been a significant improvement in efficiency. Even now, if the promise can be kept, farmers won’t need more than 20 MT (35×0.7×0.8). This has surprising implications for supply management.
At the current production of 25 MT there will be a surplus of 5 MT. India doesn’t even need to import a ton (during 2020-21 it imported 10 MT) which would result in huge savings in foreign exchange and subsidy payments (Rs 20,000 crore). There will also be no need for a new addition of capacity; the country could have survived without the five stimulus projects (including Gorakhpur). This would have generated an additional grant saving of Rs 12,000 crore per year.
As for the CSS, it could achieve the desired objective provided that the political environment is favorable. However, this is not the case. Currently, the price of Rs 24,000 DAP per tonne is 4.5 times that of urea Rs 5,360 per tonne while to maintain the desired balance in the NPK utilization ratio, the former should not exceed the double the second. In this context, even though CSS requires the farmer to use more DAP and less urea, he will continue to use more of the latter because it is much cheaper and less old because it is expensive.
In view of the above, it is quite clear that all is not well in the fertilizer business.
Modi must put the right policy in place by removing control on urea and stopping subsidizing manufacturers; instead, the government can give it directly to farmers.
This will allow them to use the subsidies mainly for the type of fertilizer that the soil needs most, which will help reduce the imbalance in fertilizer use. By ensuring that no subsidized fertilizer products are available on the market, the new regime will kill the very incentive to diversion. In addition, by aligning urea demand with actual needs, it will reduce the pressure to increase supply. There will also be a drastic reduction in subsidy spending.
(The author is a policy analyst. The opinions expressed are personal.)