Make in India push for urea, direct subsidy transfers to set the tone for fertilisers in 2017
A crucial factor in realising the great Indian dream of second Green Revolution is fertilisers but dependence of imports, excessive use of urea and subsidy leaks have marred the sector for years. The year 2016 saw some progress on revival of sick fertiliser units to cut down urea imports, and pilot project on direct benefit transfers (DBT) to streamline subsidy payments among other initiatives.
In 2017, the DBT project will be launched across the country and a lot would depend on its success. At the same time, while things look brighter for urea, total dependence on imports for potash and partial dependence for di-ammonium phosphate are likely to continue.
India produced 24.5 million tonnes (MT) urea in financial year 2015-16, highest ever and 2 MT more than previous financial year. During Kharif 2016 (April to September), availability of urea was 15.91 MT against sales of 14.41 MT.
The credit for enhanced production goes to new urea policy (NUP-2015), which led to additional production of 2 MT from the existing manufacturing plants. The NUP-2015 aimed to maximize indigenous production of urea, promoting energy efficiency in urea production while rationalising government’s subsidy burden.
However, the slump in sales in the first half of 2016 impacted industry’s profitability. According to data compiled by the ministry of chemicals and fertilizers, the total sale of urea between April and October stood at 16.145 MT, compared with availability of 18.223 MT. Similarly, sale of di-ammonium phosphate (DAP) was 5.239 MT, compared with the available stock of 6.674 MT during April-October period.
“The industry has seen decline in profits due to inventory losses in the first half of the year, but things have improved in the second half for the industry,” said K Ravichandran, senior vice-president and co-head, corporate ratings at ICRA.
Revival of sick urea plants
The Union Cabinet on 13 July approved the revival of three sick fertiliser units in Uttar Pradesh, Jharkhand and Bihar through a special purpose vehicle to be formed by three public sector units (PSUs) — Indian Oil Corp. Ltd (IOC), NTPC Ltd and Coal India Ltd (CIL). This was done to increase domestic urea production. The revival of the three units will require an investment of Rs.18,000 crore, of which Rs.5,000 crore may be infused by the three PSUs. The remaining 70% will be channelled through debt. However, lack of interest from private parties in green-field urea units still remains a concern.
“In the past, we have seen that there had been very less interest from private players in revival of these urea units as there are several risks associated with urea projects. These include no assured off-take from the government,” added Ravichandran.
Also, India is mulling over a plan to set up a joint venture project for producing 1.3 MT urea in Iran. The production meant for India’s consumption is to be done by Indian joint venture partners — Rashtriya Chemicals and Fertilizers Ltd (RCF) and Gujarat State Fertilizer & Chemicals Ltd (GSFC).
Similarly, the department of fertilizers is in process of selecting a technology partner for the revival of the Rs.9,000 crore Talcher fertiliser unit, an integrated coal gasification-cum-fertiliser plant in Odisha.
In December 2014, a consortium of four state-run companies, including GAIL (India) Ltd, CIL, RCF and Fertilizer Corp. of India Ltd signed an agreement to set up a coal gasification-cum-fertiliser plant at Talcher.
The government approved a policy on promotion of city compost in February, providing market development assistance of Rs.1,500 per million tonne for scaling up production and consumption.
In order to co-market city compost, the tagging of cities with fertiliser marketing companies has been done for proper utilisation of compost. The fertiliser companies have adopted 190 villages for promoting the use of city compost. Also, state-level steering committee has been constituted for promotion of city compost. During April-November 2016, 63,994 MT city compost was co-marketed.
Direct benefit transfer
Direct benefit transfer (DBT) is being implemented in the fertiliser sector in a modified form. The department of fertilizers has initiated a programme to implement the DBT pilot project across 16 districts. Under the tweaked model, manufacturers will be repaid only for the fertilisers bought by the intended beneficiaries, who will be identified through their Aadhaar or voter identification card details. The subsidy will be paid on the basis of actual sales captured on a point-of-sale (PoS) device.
The fertiliser companies have been asked to prepare a plan for installation of PoS devices at all retail outlets by 1 January 2017. It has also been decided that based on the success of pilot project, DBT scheme will be rolled out in entire country by March 2018.
Experts, however, believe that the new process will make the system more cumbersome. “Initially, it was planned that under DBT, the subsidy amount will be transferred into farmers’ account. But, the modified model says something else. If it is implemented, it will block the working capital for the fertiliser firms as subsidy will be received after sales are done,” said Neeru Abrol, former chairman and managing director, National Fertilizers Ltd.
Affordable phosphatic and potassic fertilisers
The nutrient-based subsidy (NBS) rates are fixed based on international prices of phosphatic and potassic (P&K) fertilisers under the NBS Scheme. For financial year 2016-17, the government has already reduced the NBS rates taking into consideration the falling international prices of P&K fertilisers.
However, with the fall in international prices of P&K fertilisers, government asked the firms in June to reduce retail prices of muriate of potash (MoP), di-ammonium phosphate (DAP) and complex NPK fertilisers by Rs.5000/MT, Rs.2,500/MT and Rs.1,000/MT respectively.
Also, to curb the price rise of P&K fertilisers, the government is scrutinizing the cost data submitted by the fertiliser companies from 2012-13 to verify the reasonableness of maximum retail prices fixed by the fertiliser companies.
In cases where unreasonableness of MRP is established, or where there is no correlation between the cost of production or acquisition and the MRP printed on the bags, the subsidy may be restricted or denied even if the product is otherwise eligible for subsidy under NBS.
The subsidy conundrum
As the government has decided to introduce DBT system for fertiliser subsidy payments, streamlining of subsidy payments will be a real challenge. Under the proposed system, 100% subsidy on various fertiliser grades shall be released to the manufacturers and importers on the basis of actual sales made by the retailer to the beneficiaries.
“Going forward, DBT in fertilisers will see more traction. During this Budget, we can see more focus on agricultural sector and steps like more credit availability to agri sector may be announced. However, the government needs to streamline subsidy payments to the industry,” said Ravichandran.
Fertiliser secretary Vijay Shankar Pandey had earlier told InfraCircle that fertiliser subsidy budget for the current financial year stands at Rs.75,000 crore and the ministry has asked for additional Rs.20,000 crore from the finance ministry under supplementary grants. Also, the ministry of chemicals and fertilizers is likely to propose a special banking arrangement (SBA) for settlement of outstanding subsidy bills of manufacturers during the current financial year.
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