In the context of the debate over increasing fertiliser subsidy, a major issue that often escapes public attention is the New Pricing Scheme (NPS) for urea. The genesis of NPS lies in the Union government asking manufacturers to sell urea to farmers at a low ‘uniform’ price unrelated to the cost of production and distribution, which is higher, and its promise to reimburse them the differential amount as a subsidy. The production cost for the purpose of arriving at eligible subsidies includes both fixed and variable costs.
The variable cost includes the cost of energy (supplied primarily from natural gas), cost of bags and water and electricity charges while fixed cost includes charges such as interest, depreciation and return on capital (the scheme allows 12 percent post-tax return on shareholders’ funds), overheads, wages and salaries, etc.
The NPS, in vogue since 2003-04 is the new incarnation of an earlier scheme called the Retention Price Scheme (RPS) that was launched in November 1977. That was ‘unit-specific’ meaning every producing unit was paid on the basis of cost specific to it. In contrast, the NPS was designed as a group-based uniform pricing scheme, whereby each unit in a given group carved out on the basis of feedstock and vintage - as per the recommendation of the Expenditure Reforms Commission (ERC) in 2000 - was to get the same subsidy amount. This was mooted as a transitory arrangement, leading to the eventual decontrol of urea. The ERC had proposed a five-year roadmap for this to happen. But the grouping concept remained on paper. NPS relapsed into a unit-wise dispensation.
The NPS administered by the Department of Fertilisers (DoF) has gone through several modifications – the latest being the New Urea Policy-2015 or NUP-2015 notified on May 31, 2015. Out of a total of 30 units, the policy is applicable to 25 gas-based plants; the remaining five were left out as these were not connected to the gas pipeline network when NUP was introduced.
Suboptimal Scheme
By nature, a unit-specific pricing dispensation doesn’t reward good performers and penalise bad guys. It happened with RPS and it is happening with NPS, as successive governments have not delivered what the ERC wanted.
In the total cost allowed to a unit, the fuel cost (this alone is 75-80 percent) is energy consumption say ‘X’ Giga calories, or G Cal, for producing a tonne of urea multiplied by delivered cost at factory-gate, say, Y in rupees per G Cal. Under NUP-2015, fuel cost is fixed for each of the 25 gas-based urea units which are classified broadly into three groups. For arriving at the energy norm (read: X) for each group applicable from June 1, 2015 to
March 31, 2018, the DoF uses two sets of figures; one, the energy norm that was applied for calculating fuel cost admissible for an earlier period of 2006-2014, and two, the average actual energy consumption achieved during 2011-12, 2012-13 and 2013-14. Then, it takes a simple average of these two figures.
For arriving at the first figure, it had used energy consumption during years prior to 2006 whereas the second figure is based on actual for 2011-12, 2012-13 and 2013-14. Such a calculation for giving subsidies to units is bizarre. What makes it stranger is that if the first figure turns out to be lower than the simple average, then, the former is used. It’s a typical case of ‘heads I win, tails you lose’.
From 2018-19, the DoF fixed target energy consumption norms for each group. For instance, the department wanted units in Group-I (which includes gas-based plants set up before 1992) to achieve 5.5 G Cal/MT. But it tagged Tata Chemicals Limited (TCL) - Babrala to the lower figure of 5.417 G Cal/MT applicable to the period 2006-2014.
Excessive Control
For arriving at the ‘admissible’ cost per tonne, fixed charges are divided by the quantum of urea that the DoF expects a unit to produce. This in turn, is taken as 100 percent of re-assessed capacity (in case, a manufacturer is found to have declared capacity lower than what the unit is capable of achieving, it is revised or reassessed). Having decided on what a unit should get on a per-tonne basis, the government should let it enjoy the gains from producing more. But, it doesn’t.
For production beyond the 100 percent level, on every extra tonne, apart from the respective variable cost, it picks up the lowest fixed charges from all 25 units. Not just that, if the total cost (fixed plus variable) per tonne is higher than the cost of importing urea, then only the latter is given. This mars the incentive to produce more.
In yet another instance of how bureaucratic red tape undermines the scheme, fixed costs were last revised in 2014. Likewise, freight cost allowed to urea manufacturers under uniform freight policy was notified after considerable delay.
To conclude, bureaucrats are micro-managing the operations of urea plants through NPS. This is the surest way to scuttle any initiative to cut costs and improve efficiency. The Modi government should exit from the scheme, decontrol urea and let manufacturers operate in a competitive environment; as for subsidy, this should be given directly to the farmers.
Uttam Gupta is a policy analyst. Views are personal, and do not represent the stand of this publication.
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