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THE UNIT-BASED RETENTION pricing system for urea may finally be on its way out with the Group of Ministers set up to formulate a new pricing policy recommending a switch to a system of uniform subsidy for units of similar vintage or using similar feedstock. In itself, this is not something new. The Government has in the past hinted at a change in the retention pricing system for urea. Further, expert committees appointed by it too have spoken of reform of the subsidy system which in turn had implications for the normative price (retention price) allowed to individual fertiliser units.

For an industry completely sheltered by the retention pricing scheme from volatility in input costs or the effects of competition, any transition from a cost-plus subsidy to a flat rate is bound to be painful. Given the inadequate domestic supplies of natural gas — the most cost-effective feedstock for urea — producers do not enjoy any inherent competitive advantage in urea manufacture. The retention pricing scheme was devised at a time when self-reliance in fertilisers had overriding priority. But now any long-term policy for urea will have to weigh the merits of self-reliance — which will mean higher financial support to domestic producers — against the pressing necessity to curtail the subsidy bill. The latter may mean meeting at least a part of the demand through cheaper imports, and rendering a part of the capacities redundant. This is an inevitable denouement for industry, if savings in subsidy are to be made. But the Government can certainly ease the transition by making a comprehensive policy announcement for urea before July, rather than making them piece-meal. In doing this, the Government can borrow directly from the recommendations of the Expenditure Reforms Commission. Instead of merely trimming the quantum of subsidy to be paid to the urea units, the Government mustaddress a host of other issues which impact the players.For instance, doing away with the controls on distribution and marketing of urea may give them greater flexibility in deciding the volume and direction of sales. Allowing players complete freedom to import and trade in urea (against the earlier system of canalised imports) will compensate them for the loss of local production. Thirdly, the selling price of urea must be allowed to rise (as recommended by the ERC) to import parity. Any policy prescription for urea will be quite ineffective without this.

One need only look at the bloating bill on the `concessions' paid to manufacturers of decontrolled fertilisers for evidence of this. Between 1992 and 2002, while the Government continued to fix selling prices of `decontrolled' fertilisers at artificially low levels, it has been forced to revise the `concession' paid to producers in line with the changes in input costs. In those ten years, the subsidy bloated from Rs 339 crore to Rs 4,515 crore. Unless the Government is ready to commit itself to a time-bound schedule for a hike in selling prices of urea, the phase-out of the retention pricing system may not serve its purpose.

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