Fertilisers once more
A few weeks ago, Reliance Industries Chairman Mukesh Ambani met Fertilizer Secretary J.S. Sarma and presented his proposal to set up a 2-million tonne fertiliser unit in the country. Ambani projected a 30 per cent return from the business. Defying gravity? After all, the rest of the industry is not able to hit even double-digit returns. Or is this just a preview of the changing face of the Rs 43,000-crore fertiliser sector that will be driven by a new policy initiative that the government hopes to finalise in a few months (See The New Deal). Says R.S. Nanda, Director and Chief Operating Officer, Nagarjuna Fertilisers & Chemicals: "We have been subsidising the government over the last few years. Our returns are controlled by the state and we hardly net a 7 per cent return." IFFCO, a cooperative and the largest fertiliser producer in the country, has margins of under 2 per cent.
Import Parity Pricing
But this is set to change. The government is planning to do away with the cost-based, fixed returns regime and usher in deregulation and import parity pricing. This could be one reason why Ambani is now eyeing the sector.
Another major reason for lack of investments in the production of urea, a fertiliser that supplies nitrogen, a key nutrient for plants, is the lack of feedstock. Thus far, gas shortages have been crippling; here again, Ambani holds the aces-his huge gas finds in the Krishna-Godavari (KG) Basin, at peak production, can meet the entire shortfall in supplies.
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| Ram Vilas Paswan Union Minister for Chemicals and Fertilizers: Subsidy woes: Besides pricing of fertilisers, the government has to bring in structural changes in its subsidy disbursal mechanism |
But agricultural growth has been stagnating over the last decade, and without a growing market, all this means little. However, there is reason for optimism. In May this year, Prime Minister Manmohan Singh announced a Rs 25,000-crore package to resuscitate the sector.
However, pumping money into the agriculture sector or improving returns for fertiliser companies alone will not help. Certain structural changes are also needed. Currently, the government subsidises only 15 specific fertiliser products containing nitrogen, potassium and phosphorous. Any variation in the product, be it the proportion or change in nutrients, means the producer is no longer eligible for subsidy. In such a case, the producer can sell the product only at market prices. Further, minor nutrients like sulphur and zinc, essential for properly nourishing the soil, are sold at market prices. Not surprisingly, farm yields have not risen in line with the increased use of subsidised fertilisers-most farmers cannot afford these non-subsidised but essential ingredients.
However, degenerating soil conditions owing to nutrition imbalance is now driving some farmers to buy non-subsidised products. Cargill's urea blend, for example, is being bought in central India at market rates that are thrice the price of subsidised urea.
In order to address anomalies like these, the government is planning to change the way it doles out subsidies-instead of product-specific subsidies, it is planning to offer subsidies on nutrients. This, experts argue, will enable the fertiliser industry to work closely with the farm community to develop suitable products.
New Game Plan
The big question, then, is: will this, like other reforms measures, offer end-users (farmers) greater choice? The key issue here is subsidy disbursal. While the bureaucracy is interested in directly offering subsidy to the farmer, Chemicals and Fertilizers Minister Ram Vilas Paswan is not. At present, the subsidy is paid to the fertiliser producer.
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| Mukesh Ambani Chairman & Managing Director, Reliance Industries: On the horizon: Reliance is projecting 30 per cent returns in an industry that struggles to touch double-digit margins |
Direct subsidies will put plastic money in the hands of the farmer, who can use the fertiliser products of his choice. Says U.S. Awasthi, Managing Director, IFFCO: "We are all for this scheme." But Paswan's concerns are genuine as well. "The ability to deliver this scheme is questionable-inefficiencies can easily creep in," says the minister.
But there is more to it than what meets the eye. When the Central government tried to implement direct subsidies for kerosene last year, it was initially welcomed. However, when the states learnt of the Centre's decision to prune the subsidy, restricting it to families below the poverty line, they turned their back even on the pilot scheme. This is not surprising, as the scheme proposed to deliver subsidies only to certain segments of society. This would have meant leaving other sections out. However, the political class was not willing to take this risk.
The situation in the agriculture sector is no different; implementing direct subsidies holds the key to pruning the subsidy bill over time. However, with general elections a little over two years away, it will be a challenge to push through this reform measure, say senior government officials.
So, the government's attempts at wooing investments in this sector may well lead to an increase in its subsidy bill. The equation is simple: if fertiliser prices are not raised, rise in consumption will increase the bill. Secondly, any marked-to-market compensation to fertiliser units will be well above what they are paid currently under the cost-based regime. In the latter, a significant number of urea units (60 per cent) operate on natural gas that is sold at controlled rates, as low as half the price sought by Reliance for gas from the kg Basin. Says Fertilizer Secretary Sarma: "We are still debating the policy. No decisions have been taken as yet."
But the fact that the government has set its mind on increasing farm productivity-it can't let the sector stagnate any longer-can only point to a bright future for fertiliser units.
