Recent reports have shown farmers worrying about crop losses because of urea shortages. The urea market is marred by recurring demand and supply mismatches because of various inefficiencies affecting the urea industry. It is important to fathom the industry’s dynamics to make sense of these inefficiencies.
On the demand side, overuse and imbalanced use of urea is a pronounced fact. While the optimal N/K ratio should be around 4, it is highly skewed in some states.
The demand dynamics are influenced by the different pricing structures and artificially created large price differentials for different fertilisers with a bias towards urea. Urea is subsidised by almost 75% while DAP and MOP have just around 35% of subsidy. Further, the level of international price passing through is also different. Fluctuations in world prices are partially passed on in the case of DAP and MOP whereas in the case of urea all burden is borne by the government as Retail Selling Price is fixed. This gets reflected in the fertiliser subsidy figures. For the period of 2015-16 to 2021-22, more than two-thirds of the total fertiliser subsidy was allocated to urea alone. As per Budget Estimates for 2021-22, urea subsidy amounts to Rs 58,768 crore as compared to the overall fertiliser subsidy of Rs 79,530 crore.
Excessive use of urea has also manifested into deteriorating Crop Response Function (kg grain/kg NPK) limiting crop yields (as per “Long Term fertiliser Experiments” of ICAR). Economic Survey 2015-16 elucidates the declining response ratio or marginal productivity of fertilisers since the 1970s, thus pointing to their inefficient use in Indian agriculture.
Production, import trend
From the availability point of view, the gap between domestic production and consumption of urea has widened, consequently, dependency on urea imports has crossed 25% of the total consumption. For instance, in 2020-21, India imported around 9.83 million tonnes of urea constituting around 28 per cent of the total consumption. To reduce import dependency, the government has been reviving closed urea plants and shifting to gas-based plants because of higher efficiency as compared to naptha-based plants.
However, in recent years, the upward trend witnessed in gas prices has exerted pressure on the domestic cost of production. In 2018-19, weighted average costs of gas-based and naphtha-based plants were USD 320.5/MT and USD 517.5/MT respectively as compared to import parity price of around USD 300/MT (Gulati and Banerjee, 2019). The increased cost of production also exerts upward pressure on subsidy payout.
Further, the structure of subsidy payout is designed to enhance domestic production but spurs inefficiency. The subsidy is given based on the firm-level cost of production rather than at a uniform level. This has led to inefficient firms operating in the market and disincentivizing any efficiency gains.
Imports act as a major stabilising factor, however, urea imports are canalised, which means that only a few major firms are involved in the import of urea and the market is relatively concentrated. The value of HHI (Herfindahl–Hirschman Index), an index that is widely used to capture the concentration in the market comes out to be 2,086 (for 2019-20) reflecting a highly concentrated market. This limits the importers from responding to market conditions quickly. Further, lumpy imports by India may adversely impact import bills. Allowing more firms to enter will ensure the smooth functioning of the market and check shortages that may emerge due to factors such as demand misestimation.
Way forward
To address the supply-demand mismatch of urea, the government has come up with various initiatives such as the Soil Health Card scheme, Parampragat Krishi Vikas Yojana, Neem Coated Urea and ICAR’s models of Integrated Farming and Integrated Nutrient Management. Recent experiments involving Drone sprayed Nano Urea are seminal and can provide a way forward.
In addition, the promotion of futuristic technologies such as coal gasification-based plants and green hydrogen production for fertiliser plants can boost production while lowering imports and promoting Atma Nirbhar Bharat Vision. Allowing more firms to import and promotion of joint ventures to secure gas reserves abroad may also be pondered over. Further, innovations such as water-soluble and zincated urea need to be promoted. Presently they get discouraged because of subsidies provided to granular urea.
In order to incentivise firms to increase their efficiency, there should be a switch from firm-based subsidy to uniform subsidy leading to the reallocation of domestic production from inefficient firms to more efficient firms. Lastly, the possibility of using DBT per hectare of land can also be explored.
(The writers are deputy directors in the Ministry of Finance)