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The heavy government intervention (1) 17-May-08 18:33

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Posted by: stox & more on ( 17-May-08 18:33 )

Minister of state for power Jairam Ramesh has reiterated that the fertiliser sector must get priority in feedstock (gas) allocation, even over power. Indeed, the situation in the fertiliser sector, nitrogenous fertilisers (urea) in particular, has become worrisome as India�s imports have risen sharply in recent years � from almost nothing in 2003-04, urea import has gone up to nearly 70 lakh tonnes (including from Oman) in 2007-08. Over 25% of our urea requirement is now being met through imports, largely because production has remained stagnant at about 200 lakh tonnes for the last 4-5 years. The heavy government intervention and the shortage of feedstock has discouraged capacity addition. Large and increasing urea import by India is one reason why prices have gone up substantially in international markets in recent years. The rising cost of import has drastically pushed up fertiliser subsidies, which are expected to touch Rs 1 lakh crore in 2008-09. What is worrying is that this fertiliser crunch has come at a time when food availability has become a concern. There is a need to increase production, and for that more and more fertiliser will be needed. However, excessive dependence on imported urea is also not advisable as India�s demand tends to push up international prices. There is a case for allocating gas resources, namely Reliance�s KG Basin gas that is expected to become available sometime in 2009, to the fertiliser sector first. Such a commitment, together with the new pricing scheme that incentivises production beyond 100% capacity and does away with the requirement of government permission for revamping existing units, would go a long way in attracting investments in urea production. The subsidy regime, too, needs to be looked into as the present off-balance sheet financing through bonds has a limit. The lack of clarity on how the subsidy is going to flow to the industry is another reason why investments are not happening � bonds issued by the government are not very liquid; fertiliser companies can sell these only at steep discounts. We need to move to a nutrient-based subsidy (from a product-based one) and give it directly to the farmer instead of keeping market prices low and compensating the producers. This would also help government target subsidy better. ET

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