You are using an older browser version. Please use a supported version for the best MSN experience.

Govt rules out cutting fertilizer subsidy

LiveMint logoLiveMint 12-06-2014 Pranav Nambiar

New Delhi: Fertilizers minister Ananth Kumar has ruled out an increase in the price of urea, the most commonly used farm nutrient in India, although the fertilizer subsidy remains a key burden on government finances.

“There is no proposal to cut fertilizer subsidies,” Kumar said late Wednesday, adding that the government’s focus would be on reducing the production cost of urea.

Reuters reported on Monday, citing government and industry officials, that India plans to raise the price of urea by at least 10% in order to contain subsidy costs that are straining the budget.

Any fertilizer price hike would stress the farm sector, which provides a livelihood to two-thirds of India’s population, at a time it is battling prospects of lower-than-normal rainfall in the June-September period that could hurt agricultural production.

On Wednesday, the fertilizer ministry held a meeting to discuss plans to revive eight sick units of Fertilizer Corporation of India Ltd (FCIL) and Hindustan Fertilizer Corporation Ltd (HFCL) to boost the production of urea.

The previous United Progressive Alliance (UPA) government budgeted `70,586 crore as fertilizer subsidy in fiscal 2013-14, but had to roll over `30,000 crore of that to 2014-15.

In the interim budget he presented in February, then finance minister P. Chidambaram had estimated the fertilizer subsidy at `67,970 crore for 2014-15, with `12,300 crore towards imported urea, `31,000 crore on domestic urea and `24,670 crore on decontrolled phosphatic and potassic fertilizers.

The Fertiliser Association of India (FAI) estimates that the subsidy burden will touch `100,000 crore, in part due to payments carried over from last year, and a possible hike in gas prices. For every $1 per million metric British thermal unit (mmBtu) increase in gas price, the subsidy bill will rise by $406 million (over `2,395 crore). Domestic gas is priced at $4.2/mmBtu. A proposal by the previous government to double the price is yet to take effect.

Fertilizer plants are the biggest consumers of domestically produced gas, using 31.5 million metric standard cubic metres per day (mmscmd). Natural gas accounts for as much as 65-70% of urea production costs in India.

An FAI official, who did not wish to be named, said the association had sought the freeing up of urea prices because delayed payments of subsidies affects the viablity of urea units. Fertilizer companies have to resort to heavy market borrowing to meet working capital needs till the delayed subsidy payments are released.

Urea prices are fixed at a maximum retail price (MRP) of `5,360 per tonne and the government pays manufacturers the difference between the cost of production and MRP. Urea prices have remained largely unchanged over the last decade.

In February, the government raised the ‘fixed cost’ of urea, one of the components used to determine its production cost, by up to `350 per tonne.

The country’s urea production has remained at 22 million tonnes (mt) since 2007-08, while current demand is about 30mt, forcing the country to meet the shortfall of 8mt through imports.

No urea capacity has been added in India in almost 13 years. The fertilizer minister hopes to boost the production of domestic urea by reviving the eight sick units of FCIL and HFCL.

After Wednesday’s meeting, Kumar said that there is “need to do a lot of groundwork” on the `35,000 crore revival plan for FCIL’s sick unit at Sindri, which is being led by Steel Authority of India Ltd (Sail).

FCIL’s Talcher unit in Odisha is being revived by Coal India Ltd and Rashtriya Chemicals and Fertilizers Ltd (RCF), and the Ramagundam unit in Andhra Pradesh by Engineers India Ltd—both are on track.

Fertilizer ministry officials said the Sindri revival plan is facing challenges with issues surrounding land acquisition and clearances.

“We have even offered to facilitate the land acquisitions. The matter now might have to be escalated at the ministerial level of the steel and fertilizer ministries,” said an official who did not want to be named.

The project includes a 1.15mt per annum (mtpa) capacity fertilizer plant and a new steel mill of 5.6mtpa capacity. A Sail spokesperson declined to comment.

Kumar did not elaborate on when the Talcher and Ramagundam projects would come on stream, but noted that they would need at least 36-48 months to become operational and require a combined investment of `9,000-9,500 crore.

The fertilizer ministry is also working on setting up a joint venture between RCF and an Iranian company to take advantage of low gas prices in producing urea cheaply in Iran, Kumar said.

More From LiveMint

image beaconimage beaconimage beacon