Financial Daily from THE HINDU group of publications
Thursday, Jul 29, 2004
Industry & Economy - Fertilisers
CCEA decision on fertiliser subsidy hike soon
New Delhi , July 28
THE Cabinet Committee on Economic Affairs (CCEA) is to take up shortly the thorny issue of a Rs 1,200-crore increase in fertiliser subsidy for the current fiscal. The substantial hike in subsidy is on account of cost increases in the production of phosphorus and potassium (P&K) fertilisers, allowing import of phosphoric acid, which is used for manufacturing di-ammonium phosphate (DAP) and imports of muriate of potash (MoP).
The domestic DAP manufacturers, who have got together to form a `phosphoric acid consumer group (PACG)', headed by the Managing Director of Tata Chemicals, have entered into an arrangement with global suppliers for sourcing phosphoric acid at $402 a tonne. Owing to differences in the duty structure prevalent in various countries, the effective rate, however, comes to $398 a tonne, officials said. India imports almost 60 per cent of the total phosphoric acid traded globally.
In the case of MoP, according to the existing arrangements, Indian Potash Ltd negotiates with international sellers to finalise the import price. This year, the company has negotiated a price of $180 a tonne as against $124.4 a tonne finalised last year.
As both these deals together would result in an increase of Rs 1,200 crore this year, the Fertiliser Minister, Mr Ram Vilas Paswan, had referred the matter with the Prime Minister's Office (PMO).
Following Mr Paswan's reference, a meeting was held at the PMO around the middle of June. Headed by the Minister of State in the PMO, Mr Prithviraj Chawhan, and attended by officials from the Ministries of Finance and Fertilisers, the issue was discussed at the meeting but no decision could be taken. And, therefore, the matter is being placed before the CCEA.
According to official sources, the CCEA is faced with four options. The first option is to calculate the subsidy amount based on last year's prices. That, however, may not be acceptable to the industry and lead to disruption in supplies.
Also, since some of the suppliers are foreign state-owned companies, it may lead to loss of the country's credibility in the international markets, sources said.
The second option would be to calculate the DAP subsidy based on the price offered by the PACG which was $372 a tonne following which negotiations had fallen through and later finalised at an average of $398 per tonne. According to sources, the industry has stated that such a wide gap between the actual imported price of phosphoric acid and $372 may not be sustainable for the indigenous manufacturers of phosphorus and potassium-based fertilisers.
The third option before the CCEA is to ask the manufacturers to renegotiate prices. But here, the problem is that the memorandum of understandings (MoUs) for supplies have already been signed and physical supplies of MoP and phosphoric acid have commenced.
The international suppliers may resort to legal action if the Indian buyers go back on the agreements, officials said.
According to Government sources, the fourth option before the CCEA is to accept the inevitability of the prices negotiated by the PACG for phosphoric acid and by IPL for MoP for working out the concessions for P&K fertilisers and agree to an additional subsidy of Rs 1,200 crore.
Said Mr Prasad Menon, Managing Director of Tata Chemicals, who headed the PACG during the negotiations, "the situation is very tight and there are some plants running out of phosphoric acid stocks. The earlier the Government is able to reach a decision, the better it is for the industry."
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