Efforts of UPA Government to Increase Urea Production in India
In 2010-11, India consumed around 31 Million tonnes of Urea, out of which 22 million tonnes was produced at home and rest 8 million tonnes was imported. Urea demand during 2017-18 is projected to be about 34 million tonnes and by 2024-25, it is expected to be 38 million tonnes.
Ironically, urea is the only chemical fertilizer that can be produced wholly indigenously. For manufacturing phosphatic and potassic fertilisers, either whole or a part of the raw material needs to be imported. The government controls the urea sector and has fixed the maximum retail price (MRP) at Rs.5,360 a tonne. The difference between the MRP and the cost of production is given as subsidy to manufacturers.
The growth in indigenous production of Urea has been stagnant vis-à-vis the entire fertilizer industry. The reason of stagnancy in Urea production is lack of capacity addition because of numerous policy hurdles and limited / uncertain availability of raw materials.
Government Efforts to increase Urea Production
On the basis of recommendations of Planning Commission panel led by Abhijit Sen, the UPA Government had notified a new Investment Policy for Urea Sector. This policy was based on import parity price (IMPP) (this actually means – I will pay you what I pay when I import) with some provisions of floor and ceiling for determining the producer’s price of urea produced from new investments. But this policy did not attract expansion in the Greenfield or Brownfield Projects because government could not come up with assured supply and transparent price mechanism for natural gas.
In 2011, one more “New Investment Policy” was launched by Manmohan Singh Government on the basis of an EGoM (Empowered Group of Ministers), such EGoMs and GoMs were in vogue during UPA regime. This new investment policy offered huge incentives to companies that decide to set up new Urea plants or expand the capacity of the existing plants. In summary, this policy ensured a 12-20% post tax return on fresh capital infused by the manufacturers. This assured return was possible because the Manmohan Government linked the Urea price to price of the Natural Gas. [Urea price=$305-335 per tonne @Natural Gas Price=6.50 per mmBTU]. It was also decided that for $1 increase in the Natural Gas prices; the price of Urea will be increased to $20 per tonne. This was a lucrative idea but on ground it did not materialize. It was reported that the businessmen are lining up to put in place new Urea plants; however on ground, we did not see any substantial increase in Urea production.
Why this scheme did not work?
All business work on the basis of some future projects costs and benefits. The current MRP of Urea is Rs. 5310 per tonne. It was assured that at 1 dollar increase of the cost of natural gas, the government would pay additional $20 per tonne of Urea. This would imply that if Natural gas goes up from 6.50/mmBTU to 14.50 /mmBTU; this would translate into $335+160=$495 per tonne. This translates into approximately Rs. 30000/- per tonne price of Urea {taking USD near Rs. 60}. That figure is six times of its MRP. Thus, the viability of such business in which their investment would need five times of support from government was not digestible to investors. We note here that imported Urea from countries like Oman costs around Rs. 10000/- per tonne. Thus, keeping MRP artificially low has been the root cause of policy paralysis in fertilisers. [currentuser_id]