A much-delayed draft fertiliser policy tries to strike an uneasy balance between the interests of the farmers and the industry

By  Ranju Sarkar 

Union Chemicals and Fertilisers Minister Suresh Prabhu is a man on the move. He's criss-crossing the country, brainstorming with farmers, economists, and fertiliser-industry representatives, seeking their reactions to his pet project: a long-term fertiliser policy which promises to usher in reform into one of the most vexing sectors of the Indian economy. The twin objectives of the policy: to provide affordable fertilisers to farmers without harming the industry in the process.

A draft policy document chalks out an eight-year time frame to decontrol the highly-regulated fertiliser industry and prepare it to cope with the stiff competition that is inevitable with the removal of quantitative restrictions (QRS) next year. In this connection, it talks of, among other things, periodic hikes in the consumer price of fertilisers, replacing the infamous Retention Price Scheme (RPS), removing existing distribution controls, and a suitable feedstock policy with an emphasis on liquefied natural gas or LNG (See The Decontrol Roadmap). It's a path strewn with landmines, given the fact that the fertiliser industry is inextricably linked with the politically-volatile agriculture sector. Admits Prabhu, 47: ''In fertilisers, the stakes are very high. There are far too many conflicting interests.''

But reforms are long overdue. Says Prabhu: ''This policy should have come 10 years earlier.'' The inadequacies of the present policies are evident from a rising fertiliser subsidy bill (up from Rs 9,918 crore in 1995-96 to Rs 13,950 crore in 1999-2000), problems in sourcing feedstock, imbalance in the use of fertilisers leading to deteriorating soil conditions and the sorry state of the industry. Fertiliser production grew by only 1.8 per cent as opposed to 9.3 per cent in the first-quarter of 1999-2000. With the government reassessing capacities, most urea majors have reported a sharp decline in profitability during the first-quarter of 2000, with the profits of several declining by as much as 44 per cent.

The industry isn't very impressed with the draft policy. Says Manu Seth, 48, former CEO of Tata Chemicals: ''It's a good policy framework, but it's vague.'' Some find the pace of reforms too slow. Avers K.S. Raju, 50, Chief Executive Officer (CEO), Nagarjuna Fertilisers: ''The time-frame of eight years is terribly long. It should be done within three years.'' Others such as Pratap Narayan, 69, Secretary-General, Fertilisers Association of India (FAI), clamour for immediate decontrol.

Prabhu rules that out completely. ''That is not advisable,'' he says flatly. Partly, politics is to blame, with the farming community objecting to any decontrol whatsoever. In any case, he argues, an immediate and sharp increase in prices will affect fertiliser consumption and, consequently, agricultural production. Prabhu's clincher: immediate decontrol will render a majority of the fertiliser industry unviable.

The Subsidy Burden

The root cause of the sector's problems is the fertiliser subsidy. Asserts Prabhu: ''Subsidies are inevitable. If we want to augment agricultural production, we must provide incentives for people engaged in farming.'' Fertiliser prices are fixed by the government and the farmers' lobby has successfully prevented realistic increases in them, thereby pushing up the subsidy bill. Under the RPS-introduced in 1977 to make India self-reliant in fertiliser production-the GOI pays fertiliser companies the difference between the sale price and the retention price, which is the price that guarantees manufacturers a 12 per cent post-tax return on net worth. The retention prices are fixed unit-wise taking into account, among other things, the cost of the project, the age of the plant, the feedstock used, and consumption norms.

Unfortunately, with their costs covered, companies had little incentive to become efficient. Agrees Bibek Debroy, 39, Director, Rajiv Gandhi Institute of Contemporary Studies: ''RPS doesn't reward efficiency and penalise inefficiency.'' There were also allegations that companies understated their capacities in order to claim higher subsidy, a point the industry hotly denies. Counters Narayan, 69: ''The subsidy bill has shot up because fertiliser prices are not being raised in tandem with rising input costs.''

Indeed, between 1980 and 2000, naphtha and fuel oil prices have shot up 2,200 per cent, while the landfall prices of gas have gone up nine times. In contrast, urea prices have increased only three times. Feedstock prices, incidentally, account for almost 70 per cent of the cost of production. Points out Pankaj Oswal, 28, Director, Oswal Chemicals & Fertilizers: '''The best way is to increase input prices when procurement prices for foodgrains are raised.''

But successive governments have desisted from such simple solutions and things don't seem to be changing. The draft policy says there is need for periodic price increases, but remains silent on the extent and periodicity of the increase.

One thing is clear: RPS has to go. Agrees C.H. Hanumantha Rao, 52, Chairman of the 1997 High-Powered Fertilizer Pricing Policy Review Committee (HPC): ''RPS has become unsustainable.'' The High Powered Committee had recommended an alternate system, which the draft promises to implement in the run-up to total decontrol. The HPC suggests that the existing unit-wise dispensation be replaced by a uniform price regime and has recommended a Normative Referral Price (NRP) of Rs 6,050 per tonne for gas-based plants, with units based on naphtha and fuel oil getting an additional amount for five years till they switch over to gas.

The urea majors, however, argued that the cost of feedstock varies from plant to plant because of factors like transportation costs, local sales tax, and the vintage of the plant. For instance, natural gas costs Rs 3,600 per 1,000 cubic metres at landfall point, while the average cost for units along the Hazira-Bijapur-Jagdishpur (HBJ) pipeline is Rs 4,500 per 1,000 cubic metres. Insists Narayan:

''A uniform price will create serious price distortions.''

Fertiliser industry sources say a committee of secretaries working on a pricing policy has calculated the NRP for different units. Naphtha-based units whose retention price is less than Rs 11,140 per tonne will be eligible for an NRP of Rs 11,140 per tonne (which is the weighted average cost of the 11 naphtha-based units under the existing RPS), while those units whose retention price is more than Rs 11,140 per tonne will get Rs 12,117 per tonne. But this, the FAI points out, will create more complications. A unit with a retention price of, say, Rs 11,139 per tonne will get Rs 11,140 per tonne, while a unit with a retention price of Rs 11,141 per tonne will get Rs 12,117 per tonne.

There's no confirmation of these figures from the government, nor does the draft policy say anything about how the NRP will be worked out. Says an economist: ''Unless they tell us what they specifically have in mind, any debate will be meaningless.''

A Separate Issue

Prabhu, however, says pricing issues are beyond the scope of the fertiliser policy and will be tackled separately. ''Pricing is a short-term measure; the policy attempts to address long-term issues,'' he argues. He also assures that the pricing policy, when it is finalised, will take into account the objections raised by the industry. But he believes the NRP to be a better alternative. ''The present system provides no incentives for units to become efficient. This system will ensure that they do,'' he asserts.

Clearly, a solution to the pricing problem needs to look at the issue of feedstock as well. The cost of feedstock in India is higher than in other countries. Naphtha, for instance, costs $7-8 per million BTU (British Thermal Units) against $5-6 per million BTU in most fertiliser producing countries, while natural gas costs $2.5 per million BTU against $1 per million BTU abroad. Says Seth: '''You can't economically produce urea without subsidising naphtha and fuel oil. How are you going to deal with this problem?''

The policy paper talks about naphtha- and fuel oil-based units switching over to gas. That won't be easy. For one, the country is grossly deficient in gas. Against a demand of 110 million cubic metres per day (MCMPD), the current domestic production is only 65 MCMPD. The government plans to bridge the deficit by importing LNG.

But the use of LNG as feedstock itself is problematic. None of the six-to-seven proposed LNG projects have taken off yet. Besides, the cost of LNG is likely to be around 85 per cent that of the naphtha price. What's more, at $5 per million BTU, LNG costs twice as much as domestic natural gas priced at $2.5 per million BTU. Points out Raman Sharma, 40, Finance Director, Oswal Chemical & Fertilizers: ''It will be as expensive as naphtha, and you would be dependent on international oil prices.''

The cost of switching over to gas may also prove to be a deterrent. Typically, units would need to invest Rs 300 crore for the transition. Argues Narayan: ''It's highly doubtful that financial institutions (FI), which are not keen to fund any expansion projects, would be willing to fund such projects.'' Prabhu, however, feels that the old policies are to blame for the attitude of the FIs and plans to involve them also in the discussions on the draft.

Transition Woes

The HPC report and the draft policy give companies five years for the shift, during which time they will get a feedstock differential reimbursement in addition to the NRP. But, industry representatives argue that if LNG is not available, and the differential reimbursement is withdrawn after five years, these units will be forced to run on naphtha and yet bear the capital charges for the switch-over. ''This is tantamount to double penalty,'' argues an industry representative. Moreover, naphtha prices may fall once LNG is available. The draft, however, is silent on all this.

There are other significant omissions. For instance, the policy deals only cursorily with phosphatic and potassic fertilisers, which are decontrolled. As it is, the present lop-sided emphasis on subsidising urea has led to its overuse, ruining the soil in the process. The policy seems to perpetuate this imbalance. Prabhu puts up a lame defence: ''That comes under the agriculture ministry.'' In any case, he says, right now the policy is only in the draft stage and the final policy will be a holistic document. Amen to that.

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