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Y2K Budget may cut the chord linking govt and agri sector

Neena Haridas in New Delhi

If the fertiliser industry has its way with Finance Minister Yashwant Sinha, the 'Y2K Budget' will seek to deregulate the industry, allowing every producer to fix his own price. Even though subsidies may not be completely dismantled, they may be rationalised and made transparent.

Dr Ashok Gulati, economist at the Institute of Economic Growth, who assisted the Hanumanta Rao Committee on farm subsidy, says, “In the deregulated environment, the fertiliser industry should be deregulated too. The government will have to smoothen out the abnormalities.”

Farm experts feel that in the current budget, Yashwant Sinha should restructure the subsidies in a rational and transparent manner. In the context of the contemplated phased deregulation of the fertiliser sector, the government should initiate a coordinated plan of action to control subsidy, they say.

“The government should focus on reining in costs of inputs, particularly hydro-carbons, utilities like power, water and railway freight on the one hand, and bringing about gradual increase in the selling price of urea on the other. Consequently, steps should be taken to lower interest rates, remove/reduce various taxes and duties, besides improving overall macro-economic management, especially with a view to prevent depreciation of the rupee,” he adds.

However, fertiliser secretary A V Gokak believes too much too fast could be detrimental to the industry. Says he, “The contemplated move towards a free economy has to be gradual so as to prevent adverse impact on consumption of fertilisers and productivity of foodgrain. A reasonable transition period is required for the industry. We cannot withdraw the subsidy immediately. There is a need to tread cautiously. We have to address the issue of food subsidy and look into the needs of marginal farmers.”

In fact, the problem in the fertiliser industry is that there have been no fresh investments in the sector, which is reeling under ballooning subsidy on the one hand and the WTO obligations on the other to dismantle pricing and distribution of fertilisers.

In the 1980s, fertiliser consumption grew at a rapid rate of 12 per cent, mainly because of the retention-pricing scheme and subsidies. Thus, with increased foodgrain output, the country moved towards its goal of self-sufficiency. Gokak agrees that fertiliser subsidies and the retention price scheme helped the country to achieve its objectives in terms of food security.

But farm experts believe, even as food security increased, retention- pricing and subsidies crippled the growth of industry.

The Union Budget for 1999-2000 too provided an allocation of Rs 80 billion (revised to Rs100 billion) towards subsidy on domestic urea. Even as the selling price of urea has remained unchanged at Rs 4,000 per tonne, a steep increase in the cost of production and transportation has led to correspondingly higher subsidy requirements.

For instance: According to figures provided by the Fertiliser Association of India, the fertiliser subsidy has gone up from Rs 600 million in 1976-77 to Rs 1.325 billion in 1999-2000.

Gulati says, “The fundamental flaw of retention-price scheme is that it allows unrestricted entry of high-cost producers. Further, it does not allow older units to generate surpluses to modernise themselves and sick units to accumulate funds for restructuring themselves to regain health. The system discourages competition and allows manufacturers to get a return from the very first day of commissioning without facing market risks.”

The Hanumantha Rao Committee had recommended discontinuation of the unit-wise retention-price scheme for urea units and suggested marginal cost pricing. But the industry has so far been reluctant to accept this recommendation.

Uttam Gupta, chief economist at the Fertiliser Association of India, "Majority of the units will close down. According to my calculation, this will mean a loss of about 60 per cent of the production. It works out to a loss of 12 million tonnes of urea.”

He feels that global urea suppliers will jack up prices and that Indian manufacturers will be completely at their mercy.

However, with the WTO coming into force -- decanalising and free imports would be permitted -- from year 2001, there is not much of an option left, but to dismantle the retention pricing scheme. Prawin Mishra, a consultant with Projects and Development India, a fertiliser consultancy, says, "The government has to find a suitable pricing scheme and phase out quantitative restrictions. Only then can the fertiliser industry be put on the growth track in an open economy.”

The industry feels that the pricing policy should be so structured as to encourage efficiently operated plants and penalise inefficiencies in operations. Gupta says, “The government should encourage implementation of energy-saving schemes.”

He argues that the policy of fertilisers should be suitably dovetailed into the overall agricultural policy, which in turn should stress on achieving higher agricultural productivity and higher incomes by using scientific agricultural practices. “Even as the benefit of fertiliser subsidy accrues to all the citizens by way of supply of foodgrain at reduced rates, if, for whatever reasons, farmers cannot be provided with cheap inputs, they should be enabled to get remunerative prices for their products,” says Gulati.

On the feedstock and distribution front too, the industry leaders want deregulation so that the market decides the price. Says Gulati, “The feedstock must go to the highest bidder. It is foolish to argue that feedstock should be made available at subsidised rates. The cost of feedstock in India will naturally be higher because we do not have much resources. The other alternative is to either import the feedstock or the fertiliser from the Gulf.”

Secretary Gokak says, "Ultimately, the issue of endowment of resources comes into play. Either we import gas as feedstock or set up facilities in the Gulf where feedstock price is cheaper."

According to FAI figures, the ex-refinery price of naphtha increased by Rs 10, 609 per tonne within 15 years, while the selling price increased only to Rs 1,650 per tonne during the same period.

Meanwhile, the price of other feedstock, that is fuel oil, natural gas, etc, have also gone up. The effective cost of feedstock is further raised on account of use of costlier liquid hydro-carbons, that is naphtha, due to inadequate supply of gas. It took 25 years for urea prices to double, although the cost of major inputs increased several times during this period. For example, naphtha went up 16 times, gas 19 times and fuel oil nine times within these 25 years.

“Such abnormalities in the feedstock prices, coupled with high investment cost caused by inflation, import duties, depreciation and high interest rates add to the rising fertiliser subsidy,” says Gulati.

On the distribution front, the government has already proposed to lift controls on all fertilisers. By removing distribution controls on a range of farm nutrients, the government seeks to make a subsidy saving of about Rs 20 billion in the next financial year.

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