After petrol and diesel, the Narendra Modi government is looking next to deregulate urea. In the works is a three-year plan to decontrol the maximum retail price (MRP) of this fertiliser — currently fixed at Rs 5,360 a tonne or Rs 268 per 50-kg bag — alongside permitting duty-free imports sans any canalisation or restrictions, and credit the subsidy directly into the bank accounts of farmers.
Urea imports now attract 5 per cent customs duty and can be undertaken only through the state-owned MMTC, STC and Indian Potash Ltd.
“In three years, we will have full digitisation of land records and soil health cards for every farmer, apart from bank accounts under the Jan Dhan Yojana seeded with unique Aadhaar numbers. That would set the stage for direct subsidy transfer along with removal of all MRP and import controls,” highly placed officials told The Indian Express.
The proposed deregulation plan may be announced in the coming Union budget for 2015-16. “Simultaneously, we could also raise the MRP by, say, 20 per cent annually for the next three years. This can be in two instalments of 10 per cent each before the kharif and rabi season of every year, so that the MRP is closer to Rs 9,500 a tonne (Rs 475 per bag) even before decontrol happens,” an official said.
Since April 1, 2010, when a nutrient-based subsidy (NBS) regime was introduced, the prices of all non-urea fertilisers — which are already decontrolled — have shot up significantly.
For instance, the MRP of di-ammonium phosphate has increased from just Rs 9,350 to around Rs 23,000 a tonne, while similarly showing a rise from Rs 4,455 to Rs 16,650 for muriate of potash and from Rs 7,197 to Rs 21,450 for the popular 10:26:26 NPK complex fertiliser.
In contrast, the Centre has raised the MRP of urea only marginally, from Rs 4,830 to Rs 5,360 a tonne. Urea has been kept out of the NBS, under which firms are paid a fixed subsidy for every tonne of fertiliser based on nutrient (nitrogen, phosphorus or potash) content even while being free to set MRPs.
Urea constitutes roughly 55 per cent of India’s total fertiliser consumption, making its decontrol all the more difficult politically. Out of the Centre’s fertiliser subsidy of Rs 72,970.30 crore budgeted for 2014-15, Rs 48,300 crore is on account of urea.
But duty-free imports and de-canalisation can also hurt domestic manufacturers. There are at present 30 plants producing nearly 23 million tonnes (mt) out of the country’s annual urea consumption of 30 mt. Their average production cost works out to about Rs 18,000 per tonne, as against an average landed price of $300 a tonne (Rs 18,600) for imported urea.
“The production costs for individual units range from Rs 11,000 to as high as Rs 41,000 a tonne. The ones with high costs will obviously shut down if the sector is thrown open to competition. We want to avoid that to the extent possible,” the officials noted.
The difference in costs arises from two factors. The first is feedstock costs that are low for plants running on domestic gas at $5-6 per million British thermal units (mBtu), as opposed to those using imported regasified liquefied natural gas at $14-15.
The second is energy consumption. There are 14 plants that require only 5-6 gigacalories (Gcal) to produce one tonne of urea, whereas 10 consume 6-8 Gcal and the remaining more than 8 Gcal.
“We are proposing a pooling mechanism, under which all producers get gas at a uniform average price. Also, the inefficient plants may be granted three years to bring down energy consumption to below 6 Gcal,” an official said.
At an average pooled gas price of $ 10/mBtu (one mBtu equals 0.25 Gcal), a plant consuming 6 Gcal could produce urea at $290 per tonne after adding conversion cost of $50.
Three years, officials feal, is “reasonable time” for full decontrol, both from a farmer and industry standpoint.
The former chairman of the Commission for Agricultural Costs and Prices Ashok Gulati, however, feels three years is too long. “Gas price pooling is an administrative decision that can be taken today. And why protect units with high energy consumption at all? These are anyway old, fully-depreciated plants that have already recovered their capital costs,” he says.
Meanwhile, there have been reports of urea shortages and black-marketing in the current rabi season. “This time, we have seen long lines and farmers paying Rs 90-110 above MRP per bag in many parts of Punjab, Haryana, Rajasthan and Madhya Pradesh,” claims Ajay Vir Jakhar, chairman of the Bharat Krishak Samaj, a farm advocacy group.
Gulati is not surprised. “If the international price of urea is $300 and MRP is just $86, there is bound to be diversion and even smuggling to neighbouring countries.”