New Proposed Fertilizer Pricing Policy Clubs Units example essay topic

FERTILIZER PRICING POLICY THE CURRENT FERTILIZER PRICING POLICY OF 2003-2004 PLUGS LOOPHOLES AS EXPLAINED BELOW: We did not expect the budget to take a bold measure like trying to increase the farm gate price of urea just a couple of years before the general elections-Unlike all expectations from the budget which was more from the revised retention pricing norms for manufacturers, the finance minister proposed an increase of Rs 240 per tonne in the farm gate prices of urea and Rs 200/ tonne for DAP and MOP. Complex fertilizer prices are to be altered to suit to the proportion of the NP mixes. This measure has been proposed to fill the expected gap in the subsidy costs of naphtha and gas feedstock. This is a much-needed measure but is not sure how the government will be able to overcome these implications on the social and political arenas. As this is a subsidy element and is a part of the budget finances, no impact is expected on any of the manufacturers of fertilizers.

Considering the relative demand inelasticity of these products in a favorable monsoon environment, we are almost sure that there will no demand gaps, as a result of this measure. Rock Phosphate, Crude Sulphur and inputs for Phosphoric acid have also been exempted from Special Additional Duty (SAD) of customs for the sake of uniformity and this was a demand from the industry and a pricing anomaly as phosphoric acid is already exempted from SAD. Given the importance of fertilizer pricing and subsidization in the overall policy environment impinging on the growth and development of the fertilizer industry as well as well of agriculture, the need for streamlining these policies has been felt for a long time. A High Powered Fertilizer Pricing Policy Review Committee (HPC) was constituted to review the existing system of subsidization of urea, suggest an alternative broad-based, scientific and transparent methodology, and recommend measures for greater cohesiveness in the policies applicable to different segments of the industry The primary consideration and goal of the new pricing policy is to encourage efficiency parameters of international standards based on the usage of the most efficient feedstock, state-of-art technology and also ensure viable rate of return to the units. The new scheme came into effect from 1.4. 2003 and will be implemented in stages.

It promotes production efficiency through cost saving measures and efficient economic practices at par with international norms by domestic urea producers. Stage-I is of one-year duration, from 1.4. 2003 to 31.3. 2004. Stage-II would be of two years duration, from 1.4. 2004 to 31.3.

2006. The modalities of Stage- would be decided by the Department of Fertilizers (DOF) after review of the implementation of Stage-I and Stage-II. Under the new Scheme, there will be no capping on production of urea. The use or sale of by-products such as ammonia, CO 2 etc. will be permitted in case considered surplus beyond the reassessed capacity for urea production. The final concession would be determined on the reassessed installed capacity.

The additional production beyond the installed capacity would receive concession if it were mopped up under the ECA allocation. The feedstock / fuel ratio for the entire production would be taken into consideration for assessing the concession. The impact of these new pricing policy parameters of Retention Price with retrospective effect led to huge recoveries from fertilizer companies. Like the previous budget, this year too, there has been a hike in the price of fertilizers. From the governments point of view, this hike in fertilizer prices will help it to reduce the fertilizer subsidy to the tune of Rs 750 crores annually. The increase in urea price in the budget will not make a dent on imbalance as prices of DAP and MOP have also been correspondingly raised.

The proposed increase in selling price of urea is a step in the right direction. Apart from yielding significant savings in subsidy, it will help in reducing the current yawning gap between reasonable cost of supply on one hand and realization from sale on the other. DRAWBACKS IN THE NEW PRICING POLICY: While the governments main concern appears to be the subsidies paid on fertilizers and the pressure from the reformers to reduce it, on the ground level there is a genuine concern generated by the diminishing natural fertility of the soil, aggravated by indiscriminate use of Urea. The latter has been brought on after the prices of Potassic and Phosphatic fertilizers were deregulated in 1992.

Given that the government's primary objective is to reduce the fiscal deficit, it is not surprising that it seeks to move in the direction of market-determined pricing of fertilisers. However, the GoM has not recommended complete deregulation of fertilizer prices. Instead it has called for continuing with the administered price mechanism while recommending decontrol of the distribution of fertilizers. Bypassing any concrete suggestions regarding changes in the pricing of fertilizers (namely urea, which is the one under price control), the Group has recommended only a slight modification in the method of working the retention pricing scheme (RPS).

This pertains to switching over to an average group retention- pricing scheme from the present practice of fixing RPS of each individual unit separately. Accordingly, the Group has suggested that the various fertilizer units should be clubbed according to their fuel usage and vintage. Currently, the retention price for each unit is fixed individually based on a normative cost Of production plus 12 per cent return on net worth. Using the twin criteria, the Group has outlined six clusters of fertilizer units, pre- 1992 gas based and post 1992- gas based, pre-1992 Naptha based and post-1992 Naptha based, low Sulphur heavy stock based and mixed energy based units. The use of this classification in order to arrive at an average group retention price is to begin from April 2003.

Interestingly, in order to test the political waters as a precursor to dismantling the administered pricing mechanism, the Group has recommended decontrolling the distribution of fertilizers. To this effect it has been suggested each unit should be allowed to sell 50 per cent of its Urea produce to farmers directly at notified maximum retail prices outside the allocation mechanism. While in the second phase, beginning April 2004, the units will be allowed to sell 100 per cent of its Urea produce outside. In other words canalization of fertilizers and making it available through the Essential Commodities Act distribution mechanism will be completely withdrawn.

Under the present system, the fertilizer subsidy has two components, one of which benefits the farmers and the other the fertilizer producers. Fertilizer subsidy to farmers represents the difference between the fertilizer prices, which farmers pay under the administered price system and the prices, which they would have otherwise paid to purchase fertilizers from the open market in a free markets environment. Similarly for the fertilizer producers the subsidy is the difference between the price they are getting under the administered price system and the price they would have got under a free market environment. It may be noted that a large part of the subsidy to the farmer actually gets transmitted to the consumers of grains. Any cut in fertilizer subsidies would raise the price at which grain is procured and would therefore necessitate an increase in food subsidy, unless the issue prices of food are raised.

Thus the rationale guiding the new fertilizer policy is that of subsidy reduction. But with too much emphasis on doing away with the system of subsidy itself (even if at some point in future), the Group has failed to tackle the crucial question of the relevance of fertilizer subsidy for ensuring food security in the country. The practice of subsidizing the farm sector in order to ensure higher levels of food grain production, while at the same time maintaining the affordability of food grains for the common man, can be justified on a number of grounds. The Groups recommendations also falls far short of addressing the problem of inefficiency in the production of fertilizers. Instead of replacing the unit wise retention - pricing scheme with a scheme for clusters of units based on fuel usage, the GoM could have gone in for a single farm gate price for Urea by adopting a uniform normative price to determine the subsidy. Such a policy, mooted in 1998 by the high Powered Committee on Fertilizer Pricing headed by C H Hanuman tha Rao, if adopted would have gone a long way to improve efficiency in the industry by encouraging them to cut costs.

Such an initiative is also expected to give an inherent thrust to non-gas based units to switch over to gas. The switch is desirable as gas is considered to be the most efficient fuel for the production of fertilizer. According to industry estimates, not only will the fresh gas supply take care of 60 per cent of the requirement of the industry but it would also bring down the price of gas. Any reduction in the cost of feedstock will automatically reduce the government subsidy by reducing fertilizer prices. In other words instead of clearing the decks for doing away with the fertilizer subsidy, the GoM could have concentrated on providing the right incentives for a restructuring of the fertilizer industry itself. This would have gone a long way in balancing the growth and efficiency of the industry while maintaining the affordability of this vital input for the farmers.

LOOPHOLES IN THE EXISTING POLICY: With the withdrawal of subsidy and concessions the prices of fertilizers 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.

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. Some opine that whatever amount is gathered as a result of the rise in the price of urea, di-ammonium phosphate and MoP should be reserved for a Soil Health Enhancement Movement. The money saved from support to farmers should be utilized to assist farmers to improve productivity, profitability and sustainability of agriculture.

This would involve setting up more labs for testing micronutrients as zinc, boron and the issue of soil health cards to farmers. Others suggest that the government should have increased the prices gradually to contain the subsidy bill. Still others feel the government should have waited till the monsoon before taking the decision While the present RPS fixes prices on a cost-plus basis for each individual fertilizer unit, the New Proposed Fertilizer Pricing Policy clubs units together on the basis of inputs used (Gas, Coal, LNG, Mixed Feed and Fuel Oil) to determine the subsidy to be paid to companies, and ignores other factors that enter the cost calculation of manufacturers, such as local taxes. It is felt that a uniform concession scheme would fail to recognize the heterogeneity in the fertilizer industry, and companies with costs above the cut-off price would be forced to go under..