• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

SINCE Budget 2001, when the Government decided to crack down on the burgeoning subsidy bill on fertilisers, there have been a series of measures aimed at curtailing the quantum of subsidy paid to manufacturers of fertilisers. Manufacturers of urea such as Indo Gulf Corporation, Chambal Fertilisers and Oswal Fertilisers have had their retention price subsidy trimmed substantially, after a reassessment of capacities (to rid it of `gold-plating), a cap on their production levels (to prevent high capacity utilisation), and a recent downward revision in energy consumption norms (to make them more cost-competitive).

All this is in line with the suggestions of the Expenditure Reforms Commission (ERC), which had mooted a changeover from the present cost-plus system of subsidy for urea (the retention pricing scheme), to a flat rate of subsidy.

However, so far, the Government has been quite reluctant to take note of the other side to the ERC's recommendations. That is, a gradual hike in the selling prices of fertilisers so that the prices are brought to import parity levels. In this Budget, it appears the Government has finally decided to take the bull by its horns by deciding to hike the selling prices of the three major fertilisers — urea, di-ammonium phosphate and muriate of potash — by 5 per cent each. This hike is welcome, for the fact that it shifts some of the burden from pruning the subsidy bill, from the industry to the farmer. However, the hike of 5 per cent in urea is far below that mandated by the ERC. The ERC had suggested a 7 per cent hike each year, starting from April 2001.

The total savings on the subsidy bill due to the 5 per cent proposed hike in selling prices could be around Rs 800 crore, which is not much, considering that the total fertiliser subsidy bill added up to Rs 14000 crore, according to the 2001-02 Budget estimates.

The sharp fall in the prices of fertiliser feedstock such as naphtha, and in global urea and DAP prices over the past yearmay tempt the government to substitute expensive indigenously manufactured fertilisers with cheap imported fertilisers. This does not augur well for domestic producers.

The hike in selling prices on fertilisers will have no direct impact on the major manufacturers of fertilisers

True, the hike could have an adverse impact on the offtake of fertilisers.

But the Finance Minister has worked around any shifts in consumption by hiking the selling prices of all key fertilisers in the same proportion.

Moreover, with the farm sector posting a healthy recovery on the back of a good monsoon, farmers are probably in a better position to absorb the hike at this particular point in time than they were a year before.

Aarati Krishnan

Send this article to Friends by E-Mail

Stories in this Section
No thumbs-up for Sinha

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line