Financial Daily from THE HINDU group of publications
Monday, May 23, 2005
Agri-Biz & Commodities - Insight
Fertiliser fallacies: Danger to food security
If some units are surviving, it is by sale of assets built in the glory days. Some of the units have learnt to live off diversified units producing products other than fertilisers.
Some have closed down. The pity is that all this, done in the name of economic reforms, efficiency, fiscal prudence, seems to lack in holistic vision!
The Government is obsessed with containing fertiliser subsidies. At the latest reckoning, the subsidies for fertilisers amounted to around Rs 12,600 crore a marginal 0.43 per cent of GDP in 2003-04.
This subsidy is, however, the consequence of the Government requiring that the maximum retail price of fertilisers shall be as decided by it.
This maximum sale price suggested is substantially below the cost incurred by the fertiliser factories. The fertiliser price is one of the last bastions of price control in India. The farmer is not protected from many other price increases, such as petrol, diesel or power. But fertiliser is considered sacrosanct.
The Government has naturally to "pay" or bear the difference between the cost of production and distribution, and the mandated sale price.
Contrary to public perception, most of the units in production today were established under a scheme that assured them that they would be compensated for the difference if the Government-mandated sale price did not meet their costs.
It is unfortunate that the Government has not seen it fit to increase the sale price of fertilisers adequately, even when prices of feedstock and other inputs have risen sharply.
In its eagerness to cut the subsidy Bill, the Government has tinkered with the unit-wise retention price scheme, which had worked well for many years, guaranteeing the costs plus a reasonable return on the equity + interest.
The Marathe Committee had in 1977 designed the scheme, which involved a detailed exercise of calculation of costs plus return for each unit. Care was taken to ensure that the units performed according to recognised norms.
Any costs incurred in excess of the norms were disallowed. The industry grew, enabling India to reach near self-sufficiency in urea in recent years.
The first fallacy in regard to fertilisers is that the subsidy goes to the industry instead of to the farmer. This impression is totally wrong. The industry is being forced to supply fertilisers to farmers at a mandated low price. The benefit is surely passed on by the industry to the farmer.
Suggestions have been made from time to time that farmers be given the subsidy directly and that the factories not be used as a channel. This suggestion flies in the face of practical difficulties.
To contact millions of farmers and give them fertiliser subsidies on the basis of proof of purchase is well nigh impossible. The industry is attacked for merely doing the Government's job by channelling the subsidy to the farmer.
Another fallacy about the subsidy is that it would be cheaper to import fertilisers if our production is costly. This alternative is also unrealistic. Today, the price of urea in the international market is quoting at roughly $305 per tonne.
Once we add the costs of transport, handling and margin, the cost per tonne of imported area is well above the weighted average price of indigenous urea imported urea costing Rs 15,350 against an average of Rs 10,830 for indigenous urea per tonne.
The average subsidy on imported urea will have to be Rs 10,500 per tonne compared to the present Rs 6,000 on an average given to indigenous producers.
Importing urea is not an economic option, even forgetting the other consequences, such as foreign exchange outgo and port bottlenecks.
The infeasibility of the import option has to be judged from yet another angle. India and China are major consumers of fertilisers. Both were large importers, except for the latest period, when India imported a small quantity of urea.
The trend in the global market has been for the international price to rise sharply whenever India and/or China start importing fertilisers. This is what has made both countries turn to self-reliance for fertilisers. Fertilisers form such an important input for farmers that it is dangerous to depend, to a large extent, on uncertain sources for supply, even if they are cheaper. But they are not.
In this context, the policy (or lack of policy) in regard to nurturing the fertiliser industry deserves to be looked at carefully.
The result of various attempts to tinker with the pricing scheme has left the industry in dire distress.
The irrationality of the system is shown up by one of the circulars of the Fertiliser Industry Coordination Committee, which says that even if the unit concerned switches to cheaper sources of fuel or feedstock to cut the cost of production, the Government will mop up the savings.
How irrational can one get in pursuit of arithmetical targets of subsidy reduction? What is more intriguing is that the Government has adopted what is known as the group-based pricing scheme. Units are distributed into different groups, based on certain criteria, and the retention prices of units in the group averaged.
The retention price of the unit concerned is based on the average of what group it is in.
This principle of group pricing is neither rational nor practical. It is not rational because the accident of existence of a costlier unit in a particular group will enable the other units to gain just by being in the group.
The principle of group average determining what price a unit can get is analogous to attempting to cross the river based on its average depth. Woe betide the swimmer who has to cross at the deeper end based on an average depth.
The fertiliser industry is often lambasted for its being less efficient than its competitors in the exporting countries. Industry data show that if energy is supplied them at costs identical to the lower costs in the exporter nations, such as the Middle East, fertiliser units in India can also compete efficiently.
Their energy consumption per unit of output compares favourably with that of the exporters in the Middle East. Suffice it to say that the Government is persisting in an illusion that the industry is inefficient when it is not so.
Indeed, the White Paper on subsidies brought out early last year by the Government in association with NIPFP showed that the present subsidy scheme results in a "negative" benefit to industry a tax on industry. A strange way of encouraging a nation-building industry that is so vital to agriculture!
The root cause of the problem is the "don't-care" attitude of the Government vis-à-vis the fertiliser industry. It is typified in its refusal to raise the farm-gate prices of fertilisers in keeping with the rise in feedstock prices and, generally, the WPI.
Statistics show that the MRP has been raised by only 4.5 per cent in the last decade, while the WPI has increased by 6 per cent, and the procurement prices by 7.8 per cent.
Had the Government increased the sale price by at least the extent of the cost increases following the petroleum price hike, there would have been much less subsidy outgo.
After all, it is more than a question of accounting. If we save on subsidy by keeping the fertiliser prices from rising, the industry runs into losses and draws on bank credit, which is anyway difficult to access, and defaults on payments to oil companies.
The Government cannot continually squeeze the fertiliser industry without destroying its potential usefulness to the economy.
Even the Expenditure Reforms Commission has recommended an annual increase of fertiliser prices by 7 per cent.
The industry needs to be looked at as one facing decline with serious consequences for the growth of agricultural output and food security. It is futile to argue, as the NIPFP has done, that additional irrigation can make up for lower fertiliser use.
Both irrigation and fertilisers are needed for agriculture to grow. Irrigation is also heavily subsidised, even more than fertilisers. Let not short-sighted fiscal marksmanship destroy an industry that is vital for the future growth of farm production and food security.
It is time to rethink fertiliser pricing policies, more in keeping with the market economy.
A phased increase in the maximum retail price, together with a rational approach to fertiliser retention price on the basis of well-established norms is the way to strengthen the industry and the farm sector.
It can be politically and economically dangerous to play games with the fertiliser industry's financial fortunes.
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2005, 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