What is new Urea Investment Policy about? Emkay explains

Moneycontrol Bureau

A quick primer on the new Urea Investment Policy which was cleared by the Cabinet Committee on Economic Affairs (CCEA) on Friday. Extracts from a note on the subject by Emkay Global:

What prompted the new Urea Investment Policy?

The widening gap between domestic demand and supply. India currently consumes 29 million tonnes of urea while the domestic production stands at 22 million tonnes leading to import of around 7 million tonnes. No new urea plant has come up in India for over a decade now.

How does government plan to encourage urea producers?

The government will assure 12-20 % post-tax return on fresh capital infused by the manufacturers for setting up of new plants as well as for expansion and revamp of the existing ones. Earlier, returns were less than 12%

How will the government ensure good returns for urea producers?

Government will cover the entire cost of natural gas, which is the main feedstock of urea. To determine the cost of production of new plants to be set up, there will be a floor and ceiling price of urea, based on natural gas price plus 12-20 % equity returns.

What is the estimate of the likely new investments in urea because of this policy?

Around 7-8 million tons of capacity could be added if the new UIP goes through. The benefit may accrue in next 3-4 years due to long gestation period of the projects

What are the shortcomings in the new Urea Policy?

Though the government has linked floor / ceiling price with gas price and committed to cover the entire gas cost, gas availability remains key concern. It is also likely that with lucrative returns in urea (12-20% ROE) some non urea players with gas sourcing arrangements may also enter into urea production.

And R Jagannathan, editor-in-chief of Firstpost.com on the negative impact of the policy on the government’s finances, and soil fertlity:

"Indian farmers already overuse urea compared to phosphatic and potassic fertilisers, and this imbalance is degrading fertile land. The prime issue in the Indian fertiliser industry is the excessive subsidisation of urea compared to the other fertilisers. The total fertiliser subsidy budgeted for 2012-13 is around Rs 60,000 crore.

If the government is going to guarantee higher returns on urea plants without raising market prices of urea (currently capped at Rs 5,360 a tonne), the subsidy bill will go up, and farmers will use even less potassic and phosphatic fertiliser and make a bad situation worse."