Subsidy on Fertilizers

7.1 With the objective of making available fertilizers to farmers at affordable prices and to promote balanced application of three main fertilizer nutrients viz. nitrogen, phosphorus and potash, urea, being the only controlled fertilizer, is sold at statutorily notified uniform sale price, and decontrolled phosphatic and potassic fertilizers are sold at indicative Maximum Retail Prices (MRP). These such sale prices are far less than the cost of production of fertilizers. The difference between the assessed cost of production and the selling price is paid as subsidy/ concession to manufacturers importers of fertilizers.

Subsidy on urea

7.2 Payment of subsidy in respect of urea is regulated through the mechanism of Retention Price-cum-Subsidy Scheme (RPS). RPS enables the manufacturers of controlled fertilizers to recover their normative cost of production along with a reasonable return on networth. The cost of production of various fertilizer units differ from unit to unit and even from month to month, depending upon the health and vintage of the plant, the feedstock used, the levels of capacity utilisation, energy consumption, distance from the source of feedstock / raw materials, cost of inputs etc. At present urea, being the only controlled fertilizer, is covered under RPS.

7.3 The RPS provides for fixation of retention price of each controlled fertilizer after taking into account the normative capacity utilisation prescribed by the Government and a combination of norms and actuals in respect of various cost elements and expenses. Pre-tax return on networth corresponding to post-tax return of 12% is given as a pal of the retention price after covering various elements of cost,

7.4 The retention prices of controlled fertilizers are normally fixed once in three years after scrutinising the cost data of the units for this period for which audited accounts are available. During the currency of the pricing period, escalation / reduction is provided to reflect variation in the prices of major inputs. Escalation is also allowed in respect of certain other items of cost (viz. salaries and wages, chemicals and consumables, repairs and maintenance, overheads etc.) where there is a significant variation during the currency of the pricing period due to unavoidable factors. In addition to the retention price subsidy, equated freight subsidy is paid to the manufacturers of controlled fertilizers to cover the cost of transportation from the production points to the consumption centres. Since the consumer prices of both indigenous and imported fertilizers are fixed uniformly, subsidy is also paid on imported fertilizers in order to bridge the difference between the cost of imports and the statutorily fixed consumer price.

7.5 The subsidy paid on indigenously produced and imported fertilizers from the year 1985-86 onwards is indicated below:

(Rs. crore)

'(B.E.) - Budget Estimate (RE) - Revised Estimate
*Differential between MRP and cost of imported fertilizer borne by the Government

7.6 The steady increase in fertilizers subsidies over the years has largely been the result of increasing production/ consumption and increases in the costs of inputs of indigenous fertilizers and prices of imported fertilizers from time to time. The cost of various inputs/ utilities, such as coal, gas, naphtha, rock phosphate, sulphur, ammonia, phosphoric acid, electricity, etc., as also the cost of transportation went up significantly during the eighties. The gas-based fertilizer units commissioned during this period also involved higher capital investment per tonne of installed capacity, necessitating constant upward revision in the retention prices. The selling prices of fertilizers to the farmers, however, remained almost at the same level between July, 1981 and July 1991. The Government effected an increase of 30% in the issue prices of fertilizers in August 1991 offer a gap of a decade. The selling price of urea, which was reduced by 10% in August 1992, was revised upwards by 20% in June 1994 followed by another increase by 10% with effect from 21.2.97. However, even this price hike did not materially alter the position as there has not been any decline in amount of annual subsidy bill, because of the steady growth in production to meet the growing demand and rise in the costs of inputs. However, due to a sharp fall in the international price of urea there has been a decline in subsidy for imported urea from 1996-97 onwards.

Concession Scheme for de-controlled fertilizers

7.7.1 Consequent upon the decontrol of phosphatic and potassic fertilizers w.e.f. 25.8.92, the prices of these fertilizers registered a sharp increase vis-a-vis the price of urea. However, in order to cushion the impact of increase in prices of these fertilizers, the Ministry of Agriculture introduced a scheme of concession on sale of decontrolled fertilizers. In a major policy initiative taken by the Government on 5.7.1996, the scale and coverage of the special concession was substantially increased to give impetus to the stagnating demand for these fertilizers and to ameliorate the nutrient imbalance in the soil which is essential for sustaining the desired growth in agricultural productivity. Again in 1997-98, along with the increase in urea price effected on 21.2.97, it was decided to increase w.e.f. 1.4.97, the concession on indigenous DAP from Rs. 3000 to Rs. 3750 per tonne and on Imported DAP from Rs. 1500 to Rs. 2250 per tonne, on MOP from Rs. 1500 to Rs. 2000 per tonne, on SSP from Rs. 500 to Rs. 600 per tonne and proportionately for indigenous complex fertilizers. These measures were calculated to induce the farmers to optimise the use of the three plant nutrients.

7.7.2 The work relating to the Concession Scheme of phosphatic and potassic fertilizers has been transferred from Department of Agriculture and Cooperation to the Department of Fertilizers w.e.f. 1.10.2000. From 1.7.2000, the level of concession has been fixed at Rs. 3700 PMT for indigenous DAP, Rs. 1350 PMT for imported DAP and Rs. 3050 for MOP. The rate of concession on SSP between 1.4.2000 to 30.6.2000 has been fixed at Rs. 800/- PMT while for remaining period of the year 2000-01, it would be Rs. 700/- PMT. The level of concession has been proportionately fixed for various complex fertilizers taking into account the NPK content in these fertilizers. During 1999-2000, an expenditure of Rs. 4500 crore was incurred under the scheme and for 2000-01, a budget provision of Rs. 4093 croro (BE) has been proposed. The amount of concession disbursed on sale of decontrolled phosphatic and potassic fertilizers since 1992-93 is given below:

National Level Consultations on Concession Scheme

7.8 In order to rationalise the guidelines and for an effective implementation of the Concession Scheme for decontrolled fertilizers viz. DAP, MOP, Complex Fertilizers and SSP the Department of Fertilizers organised a National Level Consultation on the Concession Scheme under the a chairmanship of Secretary (F) on February 9, 2001 at Vigyan Bhavan, New Delhi. The participants included the State Governments, individual fertiliser manufacturers, Industry Associations, importers and other experts. Various issues like delay in payments, speedy certification of sales by the State Governments and other related problems, were discussed.

On the basis the of discussions and inputs received, the existing guidelines of the Concession Scheme for decontrolled fertilizers are being rationalised to plug the loopholes, avoid delays and to make the scheme more transparent, efficient and effective.

Balanced application of fertilizers nutrients

7.9 In 1991-92, the year immediately preceding the decontrol of phosphate and potassic fertilizers, the NPK ratio was 5.9:2.4:1 Consequent upon decontrol of phosphatic and potassic fertilizers, the NPK ratio got distorted to 9.7:2.9:1 in 1993-94. Now, after of introduction various measures including the of Concession Scheme for phosphatic and potassic fertilizers, the NPK ratio improved to 6.9:2.9:1 in 1999-2000. There has been significant increase in the consumption of phosphatic and potassic fertilizers. During 1999-2000, consumption of DAP was 69.38 lakh metric tonne, and that of MOP was 20.49 lakh MT.

Review of pricing policy for urea units

7.10.1 Given the importance of fertilizer pricing and subsidisation in the overall policy environment impinging on the growth and development of the fertilizer industry, the need for streamlining these policies has been felt for a long time. A High Powered Fertilizer Pricing Policy Review Committee (HPC) was constituted to review the existing system of assessment of retention prices and subsidisation of urea, suggest an alternative broad-based, scientific and transparent method, and recommend measures for greater cohesiveness in the policies applicable to different segments of the industry. The HPC, which submitted its report to the Government on 3.4.98, has, inter-alia, recommended that Unit-wise RPS for urea may be discontinued. It has recommended that instead of unit-wise RPS, a uniform Normative Referal Price (NRP) be fixed for existing gas based urea units and also for DAP unit. A Feedstock Differential Cost Reimbursement (FDCR) be given for a period of five years for urea units. The other major recommendations of HPC are as under:

(i) A Ceiling Farmgate Price (FGP) be notified annually and the difference between FGP and NRP plus FDCR be paid as subsidy.

(ii) Distribution of urea be deregulated.

(iii) New urea units be set up on strategic considerations with LNG as feedstock.

(iv) Prices of nutrients other than 'N' be derived from the price at 'N' in urea. Prices at other fertilizers be computed on the basis of nutrient content.

7.10.2 In the meanwhile, Expenditure Reforms Commission (ERC) headed by Shri K.P. Geethakrishnan also submitted its report on 'Rationalising Fertilizer Subsidies' on 21st Sept. 2000. ERC has recommended dismantling of the existing RPS and in its place introduction of a Concession Scheme for urea units. The Government is presently finalising a New Pricing Policy for urea units based on the ERC's recommendations.

Long-term fertilizer policy

7.11 The Department of Fertilizers is in the process of formulating a long term fertilizer policy which will aim at phased deregulation of the fertilizer sector. A draft outline of the Long Term Policy for holding discussions with stakeholders such as State Governments, fertilizer industry, farmers, economists etc. has been prepared and has also been put on the web-site of the Department of Fertilizers for inviting comments/suggestions on the proposals made in the draft policy Draft Policy has also been discussed in seminars/workshops held in different parts of the country. Final policy will be announced after suitably incorporating the views/comments of the stakeholders and after obtaining the necessary approvals in the Government.

Reassessment of capacity of urea units

7.12 The issue of understatement of capacity and excess drawal of subsidy by Fertilizers units thereon has been under consideration of the Government since 1992 when the Joint Parliamentary Committee (JPC) raised this issue. In April 1999, an Expert Committee was constituted to carry out reassessment of capacity at all urea manufacturing units reporting high capacity utilisation and also to work out financial implications for effecting recoveries from various cut-off dates. The Expert Committee submitted its report in Nov. 1999. It worked out the reassessed capacity of urea units and financial implication thereof on the basis of five different methods. Since the Expert Committee had not given its unanimous recommendations regarding method of reassessment of capacity and the cut-off date for implementing reassessed capacities, the Department of Fertilizers has constituted a Committee at Experts under the Chairmanship of Dr. Y.K. Alagh vide Resolution dated 19.5.2000. The Alagh Committee will address to the total issue of reassessment of capacity with specific attention to the method of reassessment to be adopted, the effective cut-off date to be adopted for the purpose at recovery based on the method of reassessment, quantification of total amount of unintended benefits that have accrued to each unit and suggest modalities recover the amounts quantified.

Pending the receipt of the Alagh Committee's report and the Governments decision thereon, the Government have decided to reassess the capacities of ammonia/urea units on the basis of method-4 of the Expert Committee, as an interim measures, w.e.f. 1.4.2000. Accordingly the downward revision in retention prices of urea units has been carried out. Annual savings arising from interim reassessment of capacity would be of the order of Rs. 450 crore approximately.