1. The sale prices of controlled fertilizers are fixed by the Government of India (Department of Agriculture & Cooperation) under the Fertilizer (Control) Order, 1985(FCO), issued under the Essential Commodities Act, 1955. FCO provides that the Central Government may, with a view to regulating equitable distribution of fertilizers and making fertilizers available at fair prices, by notification in the official gazette, fix the maximum prices at which any fertilizer may be sold by a dealer, manufacturer etc. At present, only urea is covered under the statutory price control under these provisions. While the phospahtic and potassic fertilizers were taken out of purview of RPS w.e.f 25.8.1992, the low analysis fertilizers viz., ammonium chloride, ammonium sulphate and calcium ammonium nitrate were decontrolled w.e.f 10.6.1994. From 1.4.2003, RPS will be dismantled and subsidy payments to urea units from 1.4.2003 would be regulated in terms of the new pricing scheme for urea units, which has already been communicated to all urea units on 30.1.2003.

2. The prices notified by the Central Government from time to time have been much lower than the cost of production.  In order to compensate the manufacturers for lower realisation in the form of statutorily notified sale prices as compared to their retention prices (normative cost of production plus 12% post tax return on net-worth) fixed by the Government, the difference between the retention price of the individual units and their net realisation through their sale price is paid as subsidy by the Central Government to the individual urea manufacturing units under the Retention Price-cum-Subsidy Scheme (RPS) introduced in November,1977 vide Resolution dated 1.11.1977. 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.

3. 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 plants to the consumption centres.

4. Since the consumer prices of both indigenous and imported urea are fixed uniformly, subsidy is also paid on imported urea in order to bridge the difference between the cost of imports and statutorily fixed consumer price.

5. The RPS provides for fixation of retention price of individual units on per tonne basis, after taking into account the normative capacity utilisation prescribed under the scheme of the Government and a combination of norms and actuals in respect of the various cost elements and expenses.   Pre-tax return on net-worth corresponding to post tax return of 12% is given as part of the retention price after covering various elements of cost.

6. The various cost elements taken into account for fixation of retention price of individual unit fall under the following three broad categories:-

(A)  Variable Cost:                Comprises of  the cost of raw materials and     utilities.

(B)  Conversion Cost:           Comprises of salaries and wages, repairs and maintenance, selling expenses and other overheads.

(C)  Capital Related Charges:         Comprises of depreciation, interest on loans and 12% post tax return on net-worth.  (Networth = equity + free reserves)

7. During the currency of a given pricing period of three years, escalations / de-escalations are provided to reflect variations in the prices of major inputs.  Escalations are also provided 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.