Did you know that the sale price of urea, a key nitrogenous fertiliser, is lower than even common salt? Urea retails at ₹5.3 a kg, while the same quantity of common salt costs almost three times that. What’s more interesting is that the sale price of urea has gone up by a measly 10 per cent in the last 15 years – from about ₹4.8 a kg in 2002 to ₹5.3 now.
The urea price has not only lagged inflation, but also the cost of inputs such as natural gas, naphtha and fuel oil — that go into manufacturing urea. For instance, the cost of domestic natural gas has more than doubled during this period – from about less than $3 per mmbtu to over $7 now. The urea sale price has not kept pace with the increase in the realisation for farm produce either.
The minimum support price (MSP), the minimum realisation farmers are assured on agri commodities such as rice and wheat, has almost trebled during this period. For instance, the MSP for paddy has gone up from ₹510 per quintal in 2000-01 to ₹1,410 in 2015-16. Likewise, the MSP for wheat has risen from ₹610 a quintal in 2000-01 to ₹1,450 in 2014-15.
Availability, affordability
So, why have urea prices been kept artificially low, even as the costs of the underlying raw materials have more than doubled? Urea is the most widely used fertiliser and accounts for almost 60 per cent of the country’s total fertiliser consumption. This explains the rationale behind stringent price control on the fertiliser — to ensure its availability and affordability to farmers.
Urea is covered under the Essential Commodities Act – which endeavours to ensure availability/delivery of select essential commodities such as drugs and select food items. Not only is the availability and supply of urea regulated by the Government but also its price.
The Government has an elaborate pricing policy in place to arrive at the total production cost of urea. The sale price paid by the farmer is fixed by the Government. The difference between the cost of production and the sale price is reimbursed as subsidy by the Government. The average cost of production is ₹12,000-25,000 for a tonne of urea, depending on the feedstock (raw material) and age of the plant.
However, the sale price has remained unchanged, at ₹5,360 a tonne. The farmer pays just a fourth of the total production cost as sale price, while the other three-fourths is reimbursed by the Government as subsidy directly to the manufacturers.
Complex fertilisers
Unlike urea, the Government has de-controlled the sale price of complex fertilisers (phosphatic and potassic) since April 2010. The Government pays a fixed subsidy amount directly to the producer and the balance is recovered from the farmer. Here, companies are free to fix the sale price payable by farmers.
Urea being the base fertiliser, its consumption has traditionally been higher than other complex fertilisers. And this gap has further widened in the last five years, since the introduction of nutrient-based subsidy (decontrol) for complex fertilisers.
This is because, after the decontrol in 2010, the sale prices of complex fertilisers such as di-ammonium phosphate have jumped almost 2.6 times – from about ₹9,350 a tonne in 2008-09 to about ₹25,000 a tonne now. This has further pushed up the demand for the affordable fertiliser – urea. As a result of this, urea consumption in India increased from 26.6 million tonnes in 2008-09 to 29.8 million tonnes in 2013-14.
Nutrient imbalance
The steep increase in consumption is not something to cheer about, for two reasons. First, excessive and irrational use of urea has only led to further deterioration of the nutrient imbalance in the soil. Against the ideal nitrogen-phosphate-potash (NPK) ratio of 4:2:1 the current ratio stands at 6.5:2.9:1.
The ratio has worsened in the last five years; it was at 4.3:2:1 in 2009-10. The deterioration in the soil nutrient balance is a big challenge facing India, given that the area under cultivation has remained more or less stagnant over the last few years.
Second, while the consumption of urea has seen a steady rise, production has failed to keep pace with the surge in demand. The stringent regulatory environment and unfavourable policy parameters have deterred the industry from making fresh investments in this space.
Rationalising urea use
While companies such as Chambal Fertilisers and RCF had earlier expressed interest in expanding urea capacity through the brown-field route, their expansion plans have been put on the back-burner for now, pending finalisation of the new urea investment policy.
As a result of stagnant domestic production, the country has been forced to import almost a third of its annual urea requirement, making it vulnerable to the fluctuations in global fertiliser prices and international currencies. This has inflated India’s fertiliser subsidy bill. The total subsidy on indigenous and imported urea has gone up from ₹33,924 crore in 2011-12 to ₹50,300 in 2014-15 (revised estimate).
In this background, de-control of urea pricing may be the ideal long-term solution to ensure rational urea consumption that will restore the soil nutrient balance. Such balanced use will, in turn, boost the country's economic prospects by reducing dependency on imports and lowering the subsidy burden on the Government. Besides these, protecting soil health is critical to meeting the country's food security needs in the medium term.