Indian Fertiliser Policy Implications

8/8/2019 Indian Fertiliser Policy Implications

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Current Status of the Fertilizer Industry In India - PolicyEnvironment and Implications for the future

U.S. AWASTHIMANAGING DIRECTOR

IFFCO, NEW DELHI

ABSTRACT

Mounting pressure of subsidy on fiscal deficit of the country has

compelled Government of India to take a decision to gradually withdraw

the subsidy, heading towards total decontrol in a phased manner. A long

term policy for fertilizer sector is under consideration, covering the

problems of feedstock, fertilizer pricing, total decontrol, WTO related

issues etc. The present policy environment is not investment friendly and

viability of several existing units will also be adversely affected. A switch

over in feedstock from naphtha to LNG for urea is contemplated, however,

its availability and price is still uncertain. High energy cost do not permit

further expansions in urea capacity within the country, joint venturesabroad are likely to be developed.

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1.0 Introduction

Economic liberalisation and reforms are the two key notes of the

Government's political philosophy today which has embraced almost all

sectors of the economy. Even in the case of the fertilizer sector, an

attempt to introduce liberalisation has been made since August 1992. It is

obvious that the fertilizer sector has to fall in line with the rest of the

economy and a total decontrol would therefore have to be ultimate goal

for this sector. In 1992, with a view to reducing the subsidy, all the


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phosphatic and potassic fertilizers were decontrolled. Consequently the

prices of these fertilizers increased sharply leading to fall in their

consumption and distorting the ratio of fertilizer consumption. The

retention pricing scheme (RPS) which was introduced in 1977 thus got

confined to urea only. The nineties remained a decade of uncertain

policies. To review the existing system of subsidisation of urea and

suggest an alternative broad-based scientific and transparent

methodology a High Powered Fertilizer Pricing Policy Review Committee

(HPC) under the Chairmanship of Professor C.H. Hanumantha Rao, was

set up. The Committee has explored a number of options for determining

producer price such as the existing RPS with some modification, group

retention price, uniform administered price and market oriented system.

Government of India is drawing a long term policy for fertilizer industry

which is to ensure that the transition to total decontrol is achieved in a

phased manner. GOI proposes to decontrol fertilizers completely by

2006.

2.0 Draft Long Term Fertilizer Policy

The proposed Long Term Fertilizer Policy has chalked out a threephased programme starting 2000-01 to 2006-07 with definite actions to be

performed in each phase as listed below;

Phase 1: 2000-01 and 2001-02

(A) Removal of Aberrations and Deficiencies

i) Reassessment of capacity and modulation of off take depending

on demand

ii) Increase in the price of urea at regular intervals

iii) Improvement in the implementation of the concession scheme

(B) Initiation of New Measures

i) The problem of feedstock

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ii) Feasibility of a coal based technology

iii) Joint Ventures

iv) Decision on fertilizer pricing policy

v) Policy towards creation of new capacity

vi) WTO related matters

vii) Removal of distribution controls on urea

viii) Extension of concession scheme to bio fertilizers

Phase II (2002-03 - 2003-04)

i) Final decision on feed back

ii) Creation of new capacities long term perspective

iii) Decision on degree of protection to indigenous industry

iv)New initiatives

a) Role of the regulator

b) Extension of concession scheme to urea

c) Removal of MRP

d) Emphasis on productive investment

e) Change in the relationship between industry and the

farmersf) Balanced fertilizer use

g) Eco-friendly fertilizer use

h) Creation of Fertilizer Policy Planning Board

Phase - III (2004-05 - 2006-07)

i) Withdrawal of MRP and Concession scheme

ii) Role of Government in decontrol scenario

iii) Policy relating to LNG

3.0 W. T. O. Implications

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Quantitative restrictions on import of fertilizers have been removed

since April 1, 2001. The proposal to institute a tariff rate quota (TRQ) for

urea imports has been put on hold for the time being, retaining the basic

custom duty of five per cent for the year 2001-02. Under the TRQ regime,

it is proposed to allow imports of a specific quantity at the existing rate of

five per cent custom duty and quantities beyond at higher custom duty.

At present, there is no bond rate of duty on urea and Government

can impose a higher tariff say 150-200 per cent in future. But pegging the

duty at such levels may not be appropriate because imports of urea thus

will become costly to meet the demand-supply gap which is likely to

increase in future. The TRQ option will therefore, provide the flexibility in

importing a certain critical quantity at a lower duty. Urea imports have

been canalised through MMTC, STC and IPL. The exim policy has

continued with this arrangement, though it has been mentioned that the

designated parastatals would have to function henceforth on 'Commercial

Principles' in accordance with Article XVII of GATT. In other words they

can import any quantity without any restriction. There will be a bond rate

of 5 per cent custom duty on import of DAP and MOP. The W.T.O relatedissues are under detailed examination by the Government.

4.0 Implications for Future

4.1 Production of Fertilizers

India has become third largest country with a total capacity of 11.07

million tons of N and 3.760 million tons of P2O5 in year 2000-2001.

Further capacity addition for N has now been stalled for the time being

due to very narrow demand supply gap at present and costly feed stock.

However, there will be some addition to the phosphatic capacity.

Domestic production of nitrogenous fertilizers was 11.004 million

tons in 2000-2001, whereas production of phosphatic fertilizers was 4.70

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million tons (Table-1), which are marginal higher compared to last year

production. All India capacity utilization has gradually improved over the

years and was maintained at almost cent per cent level for N. However,

during 2000-01 restrictions were imposed on capacity utilisation of Urea at

92% as a consequence the production of urea declined. The increase in

production of total N is observed due to increase in production of DAP

and other complexes which also have 'N'. Production of DAP during

2000-01 was 10 % higher compared to previous year. The capacity

utilisation for P2O5 fertilizers was cent per cent (Table 2).

Table-1 Capacity and Production of N and P Fertilizers in India (000

tons)

3,74811,0043,74811,0682000-20013,40710,8733,74811,0681999-20003,18110,4773,20610,5711998-993,05810,0833,1659,9871997-982,5788,5932,9489,3321996-972,5938,7692,9248,9981995-96PNPN

ProductionCapacityYear

New Capacity building for production of urea will now take place

where the natural gas is available in abundance and at low price.

Government is keen on implementation of Indo-Oman Fertilizer Project.

The financial closure could take effect in October 2001 and the

commercial production will begin 36 months after that. The entire

production of 1.65 million tons per annum of urea from this project will be

purchased by India on long term basis.

Table - 2 Production of Urea and DAP in India (000 tons)

2,64515,8051995-96

DAPUreaYear

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4,88819,7342000-20013,86119,8071999-20003,86419,2921998-993,66518,5941997-982,76515,6281996-97

4.2 Imports of Fertilizers

Imports of urea has declined substantially during the past five years

(Table 3). There has been no imports of urea during 2000-01. Already

there is a huge stock of urea, around 2.5 million tons as on march 31,

2001. Therefore there will be no need for any further stock building during

next six months. India is presently self sufficient in respect of urea.

Table- 3 Imports of Fertilizers : 1995-96 - 1999-2000 (000 tons)

2,450844682000-2001 2,9463,2685331999-2000

2,5792,0915561998-992,3801,5362,3891997-98

1104752,3281996-972,3561,4753,7821995-96

MOPDAP

Urea

Year

4.3 Investment in Fertilizer Industry

Fertilizer production is capital intensive and presently the cost of

production of indigenous material is high and returns on investment are

low. The Indian fertilizer industry which achieved phenomenal growth in

eighties, witnessed decline in the growth rate during the nineties. In the

recent past, the fertilizer industry has not attracted any significant

investment. No multinational has invested in fertilizer sector in India.

Due to sufficient indigenous capacity and low international prices of

urea the Government of India in Feb. 2000 decided that no new

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grassroots projects will be allowed during the next three years in either

public, private or cooperative sector. So even if the Government reviews

its decision, the earliest a project could start would be by 2004-05.

Government is also considering disinvestment of its equity of public

sector fertilizer units upto 51 per cent or even more. Thus, handing over

the management control of the company to a strategic buyer. The

disinvestment in National Fertilizer Limited (NFL), a major urea producer

in the country is underway.

Lack of availability of natural gas in the country has prompted

investors to collaborate for joint ventures abroad for urea production. Gulf

countries, due to abundant availability of gas, nearness to Indian shores

and investment friendly environment, are becoming the first choice for

joint ventures.

Among the Public Sector Units, The Fertilizer Corporation of India

Limited (FCI), Hindustan Fertilizer Corporation Limited (HFC), Projects &

Development India Limited (PDIL), Pyrites, Phosphates & Chemicals

Limited (PPCL) were declared sick. They are under consideration of

Bureau of Industrial and Financial Restructure (BIFR).

As India does not have potential rock phosphate reserve, it is

completely dependent on import of either rock phosphate or phos acid or

DAP. There has been new capacity addition by way of importing rock

phosphate and converting it to phos acid and then to DAP/NPK or

conversion of phos acid at rock phosphate mines abroad in JV and

importing phosphoric acid for further conversion to DAP/NPK. It is

heartening to note that apart from the operating joint venture plants for

phosphoric acid in Senegal, Jordan and Morocco some more projects and

expansions are being contemplated by the Indian companies.

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4.4 - Feed Stock Option

Natural gas is the most efficient and economical feed stock for

urea. However, limited availability of domestic natural gas has resulted in

expansions of urea capacities with alternate feed stock Naphtha which is

a costly option. Most urea plants are based on natural gas as feedstock

followed by naphtha. Shortage of natural gas is compelling even the

existing gas based fertilizer plants to shift towards the use of naphtha

thereby increasing the cost of production . The expansion projects

implemented recently have dual feed arrangements, both for natural gas

and naphtha. Nearly 47 per cent of the total existing urea capacity is

through natural gas while naphtha and fuel oil account for 32 per cent and

11 per cent respectively. Thus, 90 per cent of the total urea capacity is

based on hydrocarbon feed stocks and the remaining 10 per cent on

others.

4.4.1 - LNG as Feed Stock

A consortium of fertilizer companies have chalked out a pioneering

Rs.200 billion mega plan for import and distribution of LNG for use asfeed stock for their existing and future urea plants. This proposal

of the consortium is not finding much favour with a section of the fertilizer

industry who feel that distribution and supply of LNG is a complex

business and it is better to tie up with oil majors in the country for supply

of LNG. The Committee set up under the chairmanship of the author by

the Union Ministry of Chemicals and Fertilizers in its interim report

suggested creation of a Rs.100 billion joint venture company by equity

participation from the existing fertilizer companies for sourcing LNG,

Naphtha, LSHS and other petro products from the eastern coast. This

joint venture company will lay requisite network of pipelines to source

necessary feed stocks. The Committee estimated that the fertilizer

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production with the feed stock from this projects will be cheaper by at

least 20 percent.

4.4.2 Feed Stock Pricing

Attention need be focused on taking appropriate measures for

reducing the cost of feedstock and reducing energy consumptions. All out

efforts have to be made to protect naphtha and fuel oil based plants,

which have fully paid back their investment. Unless the feedstock price is

assured at international competitive level there is little that such plants

can do to achieve low production cost.

The administered prices of fuel oil, naphtha, LSHS and natural gas

have increased considerably during the last few years (Table 4 and 5).

Table-4 Basic Selling Price for Fuel Oil, Naphtha and LSHS for

Fertilizer Sector.

8,84013,2108,380April, 200110,63016,39010,050October, 200010,41013,3709,840April, 2000

7,50010,1407,000August, 1999

5,0106,8204,670August, 1998

LSHS Rs/tonNaphtha Rs/tonFuel oil Rs/KlEffective date

As a consequence of this the cost of production has also

increased, which has eroded the profitability of the unit and increased

subsidy on fertilizers.

Table-5 Natural Gas price for Fertilizer Industry

65.742,850October, 199955.552,222October, 199855.842,150October, 199763.321,550January, 199266.671,400January, 1987

$/1000 cu.mRs./1000 cu.mEffective date

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In the background paper on Long term policy in fertilizer sector it is

recommended that naphtha and fuel oil based plants should switch over

to LNG during next five years. However, considering the uncertainties in

the implementation of LNG projects, it will be doubtful to implement such

switch over.

4.4.3 Affordable Cost of Feed Stock

In a recent study on Naphtha market by Tata Energy Research

Institute (TERI) it is reported that the price of LNG for fertilizer plants in

northern India as indicated by Gas Authority of India Ltd. (GAIL) will be in

the range of US $ 4.5 - 5.0 per million BTU, which is quite high compared

to the agreed gas price of US $ 0.77 per million BTU for Indo-Oman

Fertilizer Project. Expenditure Reform Committee (ERC) of Government

of India have recommended the farm gate price of urea at Rs.7000 per

MT along with a concession of Rs.1900 per MT for a gas based plant.

With this pricing a new gas based urea plant having an energy

consumption of 5.4 G Cal/MT urea can afford an energy price of US $

3.73 per million BTU and a new naphtha based urea plant having energyconsumption of 8 G Cal/MT urea can afford energy price of US $ 2.39 per

million BTU. Thus, considering a more energy efficient naphtha based

urea plant having an affordable energy cost of US $ 3.1 per million BTU

the corresponding price of feed stock naphtha will be US $ 118 per MT

FOB Arabian Gulf (AG) compared to prevailing naphtha price of US $ 233

fob AG in Feb. 2001. This affordable naphtha price of US $ 118/MT fob

AG can be achieved at a crude price of US $ 11 per barrel which is quite

unrealist compared to prevailing crude price around US $ 30 per barrel.

This makes the urea production highly uneconomical compared to the

International gas/urea prices . There is wide gap between urea price and

energy price in international market as compared to Indian situation.

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Most of the capacity of DAP is located in coastal areas and is

based on imported phosphoric acid and ammonia. The SSP plants are

scattered all over the country accounting for nearly 20 per cent of P2O5

production. Although ammonia prices in recent past have gone upto US $

210 per MT C & F India, but the phosphoric acid prices reduced from US

$ 412 per MT P205 C & F India in 1999-2000 to US $ 360 per MT of P205

C & F India in 2000-01, thereby not affecting cost of production of

phosphatic fertilisers significantly.

4.5- Subsidy on Fertilizers

The union budget for 2000-01 raised urea prices by 15 percent,

DAP by 7 percent and that of MOP by 15 percent. This move enabled the

Government of India (GOI) to prune the subsidy bill to some extent.

However, there was no increase in urea price in the union budget for

2001-02. In the long term policy, the subsidy withdrawal in a phased

manner has been proposed. However, modalities to phase out the

subsidy has not been clearly mentioned.

With the withdrawal of subsidy and concessions the prices offertilizers will increase. In the totally decontrolled scenario, the stability

and uniformity of fertilizer prices is not likely to be achieved. Indian

farmers who were getting fertilizers almost at the uniform price

throughout the country may not continue to avail this opportunity. They

may also witness fluctuating market price of a fertilizer within a short span

of one crop season. Such price variation may affect farmers purchase

decision as well.

4.6 - Research and Development Efforts

Fertilizer use in India is mainly limited to urea, DAP, MOP and SSP.

Else where in the world the specialty products such as completely soluble

solid fertilizers for drip irrigation and efficient products like USG, Coated

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It is feared that several fertilizer units will be closed down in the

process of switch over from the present administered pricing mechanism

to a market based regime. This would mean substantial loss of domestic

fertilizer production and corresponding increase in import of urea to meet

the demand. Even under the present circumstances health of industry is

not good and several units have become loss making.

According to Expenditure Reform Committee (ERC)

recommendation, instead of unit-wise retention price there will be a

group-wise lump sum concession per ton of urea based on feed stock

which will harm some units and benefit others and there will be wide

spread sickness in the urea industry.

4.9- Fertilizer Consumption

Urea and DAP are the most popular fertilizers, accounting for 57.0

and 15.5 percent respectively, of the total fertilizer material consumed in

the country. NPK grades which can help in promoting balanced

fertilisation, constitute only 5.5 percent of the total fertilizer materials.

During 2000-2001 urea price was raised by 15%. The year has witnesseda fall in urea consumption marginally.

The per hectare consumption of fertilizer nutrients in India around

100 kg/ha which is low almost 1/4 - 1/3 to of Nether land, Korea, Japan

and Belgium. Even, Within the country, there is large variation in fertilizer

use amongst different States.

The ideal N : P : K ratio, aggregated for the country as a whole, is

4:2:1, however, during 1992-93 after decontrol of phosphatic and potassic

fertilizers the NPK consumption ratio distorted to 9.5:3.2:1 and still

continues to be quite wide at 7.0:2.7:1 in 2000-01 compared to 5.9:2.4:1

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before decontrol of phosphatic and potassic fertilizers in 1991-92. Such

imbalanced application of fertilizer is bound to affect the crop productivity

and soil fertility in the long run. Besides imbalanced use of NPK,

deficiencies of other secondary and micro-nutrients are also becoming

apparent now. The concept of balanced fertilizer application therefore

has to consider these elements, particularly sulphur, zinc and iron. Low

organic matter content in Indian soils and lack of adequate sources for

micro-nutrients make it imperative to increase use of organic sources like

FYM, green manure, bio-gas slurry etc. There is a need to practice

Integrated Plant Nutrient Supply System (IPNS) to bring back the balance

in soil fertility and fertilizer use.

4.10 - Innovative Approaches in Increasing Nutrient Use

Efficiency

The low efficiency of fertilizer use in India is a matter of concern.

Nitrogen use efficiency in rice crop is only 30-35 percent, with an overall

efficiency level at 50 percent. Phosphatic fertilizers are the costliest on

Rs./kg of nutrient basis but their use efficiency is 20-25 percent only.

Efficiency of potash is around 70-80 percent. Efficient utilisation offertilizer, therefore, is key to economics of fertilizer application and

environment friendly sustainable agriculture. Adoption of the best time,

method and dose of fertilizer application by the farmers is essential to

achieve higher efficiency of fertilizer use. Soil testing to determine the

fertilizer need, suitable fertilizer drills for placement of fertilizers, promotion

of slow release materials, IPNS and other improved agronomic practices

will certainly help in increasing efficiency of applied fertilizers. Use of

coated urea, USG, precision farming using GIS for decision support

system in efficient use of fertilizer will become necessary to enhance the

Fertiliser Use Efficiency.

5.0 CONCLUSION

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Indian Fertiliser Policy Implications

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