Self-sufficiency in fertilisers or building castles in air?

Self-sufficiency in fertilisers or building castles in air?

Union Minister for Chemicals and Fertilisers Ananth Kumar has announced the government’s decision to revive five closed plants of Fertiliser Corporation of India (FCIL) and Hindustan Fertiliser Corporation Limited (HFCL).

They are: Talcher (Odisha), Ramagundum (Telangana), Sindri (Jharkhand), Barauni (Bihar) and Gorakhpur (Uttar Pradesh). To be commissioned by 2020-21, their revival is expected to add 7.5 million tonnes (mt) of urea capacity.

The minister has also exuded confidence that the decision for mandatory neem coating of urea (2015) will result in 10% improvement in the efficiency of fertiliser use. Taking urea consumption of about 33 mt annually, this will save about 3.3 mt. He also referred to steps for increasing utilisation of the existing capacity. This has led to increase in production from 22.5 mt during 2014-15 to 24.5 mt in 2015-16. This was slightly lower at 24.3 mt in 2016-17.

There is a fourth factor. This concerns elimination of urea diversion to chemical factories (or smuggling to neighbouring countries) due to neem-coating which renders it useless for any purpose other than agriculture. Taking diversion at 30%, additional supply to farmers due to its stoppage will be about 10 mt.

Connecting all dots, there will be an extra cushion of 20.8 mt (7.5 mt: revival of closed plants, 3.3 mt: better use efficiency and 10 mt: stoppage of diversion). After wiping off the current deficit of 8.7 mt (demand 33 mt vs production 24.3 mt) and incremental demand of 4.5 mt (@5% per annum and subsuming 10% use efficiency), three years from now, India will have a surplus of 7.6 mt.

What a wonderful transformation it would be — from a huge deficit of 8.7mt (2016-17) to a huge surplus of 7.6 mt during 2020-21! The projected scenario appears too good to believe. It is therefore necessary to do careful scrutiny.

At the outset, let us take up neem coating of all of urea supplies. This order was issued two years ago (2015). Now, if Prime Minister Narendra Modi is to be believed about ‘complete stoppage of all diversion’, then, by now, all of diverted quantity – that is 10 mt - would have been available to the farmers. Correspondingly, import would have been reduced to zero.

Yet, during 2016-17 (April – January), India imported about 5.2 mt. The import during 2015-16 (April–January) being 8.1 mt, this is a drop of about 3 mt. Since a good portion of this is due to higher domestic production, contribution of plugging diversion is even lower. Clearly, neem coating has not made the desired impact.

There are two major reasons for this. First, it is nearly impossible to track 660 million bags. Second, the government has not yet addressed the most potent cause behind diversion. It continues to control MRP of urea at an artificially low level (1/3rd to 1/4th of market price) which propels traders to indulge in diversion.

As regards the increase in efficiency (albeit by 10%), one wonders how this could be achieved in the face of continued imbalance in use caused by distortion in pricing and subsidy policies.

The government gives much higher subsidy on urea (main source of N or nitrogen) vis-a-vis complex fertilisers (source of P or phosphorous and K nutrient or potash). This makes former much cheaper than the latter, prompting farmers to apply more of N when compared to P&K, thereby causing imbalance.

On revival, the plants have remained closed for more than one-and-a-half decade. In the past, several attempts were made to resurrect them but failed to go beyond the drawing board. Clearly, the past does not instil confidence. Whether the revival plan mooted by the Modi government actually takes off remains to be seen.

Prima facie, the mammoth investment Rs 50,000 crore (Rs 30,000 crore on setting up of projects plus another Rs 20,000 crore on setting up terminal for handling imported liquefied natural gas and laying pipelines to reach gas to plant locations) are needed to make it happen and this leaves one in serious doubt.

Cash-rich PSUs
Given the dire need to rein in expenditure in the context of stiff fiscal deficit roadmap, it is unlikely that the government will provide any budgetary support. Ananth Kumar has alluded to roping in cash-rich public sector undertakings (PSUs) in energy and oil sectors — Indian Oil Corporation, Coal India Limited, National Thermal Power Corporation and Gas Authority of India - purportedly to fill the funding gap.

This is a dangerous idea as each of these undertakings already have huge investment commitments in their own core sphere of operation to achieve the assigned targets (consistent with the requirement of double digit growth in GDP). Now, if they divert cash to funding fertiliser projects, it will be at the cost of compromising those targets. It is tantamount to ‘robbing Peter to pay Paul’.

The bigger question is that even after commissioning (at such huge cost to other PSUs), whether revived plants will be able to maintain their viability under the new policy environment of urea decontrol and payment of subsidy directly to farmers (as already committed by Modi). Given the high capital cost associated with revival of projects, the production cost of urea from these will be much higher than other units as also import and hence unviable.

In sum, a major slice of the projected cushion of 20.8 mt is unlikely to see light of the day. Therefore, India will continue to remain in substantial deficit and depend on import to make up.
To set things right, the government should take steps to correct extant policy distortions, align policy for urea with that of complex fertilisers and implement direct benefit transfer by crediting subsidy in to farmer’s account (not the way it is done in pilot projects in 11 districts wherein subsidy continues to be routed through manufacturers). Sans these, it will only be building castles in the air.

(The writer is a Delhi-based policy analyst)