Revised policy to link urea floor price with gas price

The floor price is the minimum production cost that the fertiliser ministry takes into account while reimbursing the subsidy on urea. The government fixes the maximum retail price of urea. The difference between MRP and production cost is given to the manufacturers as subsidy.

"Under the New Urea Policy, announced in 2008, the floor price of urea was constant at USD 275 per tonne irrespective of the gas price. But, the revised policy will link it with the delivered gas price thus, insulating investors from the gas price fluctuations," a senior ministry official told PTI.

The new policy will not tinker with the existing floor price, which currently stands at USD 275/tonne, including the carrying cost at a gas price of about USD 6.5/mmBtu. The fluctuation in the price of gas, if any, would be borne by the government. However, the proposed change in the policy is unlikely to increase the subsidy burden of the government as the global fertiliser price is mostly linked with the gas price.

"The assurance to bear the cost of rise in gas prices by the government will encourage investments and decrease India's dependence on imports. This will help us to curtail and check subsidy and hedge us from the fluctuation of global fertiliser prices," the official said.

The Centre had brought out a 'new investment policy for urea' in 2008 to attract fresh investments into the fertiliser sector, but failed to see much investment, except for revamp projects, in the absence of any assurance of firm allocation of gas at pre-determined prices from domestic sources.

The industry also demanded the Centre insulate it from any additional liability arising due to increase in delivered price of gas. "The revised policy is now with the ministry and will be sent for Cabinet's approval soon and is expected to be notified in next two-three months," he said.

Industry sources said at least half-a-dozen fertiliser firms have proposed to undertake expansion but expressed concern regarding pricing and firm availability of gas before taking final investment decision. There are 28 urea units currently operating with an installed capacity of 20 million tonne per annum.

Since announcement of the New Urea Policy, the industry has increased the capacity by about 1.5 million tonne per annum. Out of the existing urea units, 20 are now gas-based and four are based on naphtha and FO/LSHS each as feedstock. The total requirement for natural gas for the existing 20 units is 40.92 mmscmd.

The country's urea demand was 26.6 million tonne in 2008-09 and 28.19 million tonne in 2009-10. The government has allocated about 15mmscmd of gas from Reliance Industries KG basin to urea makers.