If the beleaguered fertiliser sector was hoping that announcement of a new investment policy would end the decade-long drought of capacity addition in urea manufacture, it is in for disappointment. A key issue is the availability of feedstock for urea production, notably natural gas, but there is little sign of that. Though the empowered group of ministers (EGoM) on gas, headed by the external affairs minister, Pranab Mukherjee, wants to give the highest priority to the fertiliser sector in gas allotment, the logistics of supplying the gas are yet to be sorted out, and will not happen soon. Ram Vilas Paswan, the fertiliser minister, has taken up the issue with the EGoM, urging it to ask GAIL (India) to quickly connect gas grids under the Hajira-Bijapur-Jagdishpur pipeline project. This is important as, in the absence of such connectivity, potential investors in fertiliser units cannot sign gas-sale agreements, nor can bankers finance any urea projects. By Mr Paswan’s reckoning, at stake are potential investments worth Rs 40,000 crore. Funding of this order in setting up new urea units and expanding and de-bottlenecking the existing ones can reduce sharply the country’s import dependence when it comes to urea, running currently at 25 per cent.
Naturally, there is no dearth of people who wonder whether new investors would enter the fertiliser sector when it is faced with such unresolved issues. For most people, the level of risk when compared with the likely return in a sector governed heavily by government decisions, would simply not be worth the candle. On top of this, there is the liquidity crunch brought down on the industry by the government’s failure to clear subsidy payments, estimated for the current year at a massive Rs 1.12 lakh crore. The budgetary provision for fertiliser subsidy is barely a third of this sum. The part payment of these arrears through bonds has been of little avail for the urea units, as these bonds are traded at a discount, resulting in a net loss to the industry — which has already given the subsidy to farmers on behalf of the government. It is also worth noting that the government’s failure to fork out the subsidy, which has forced the fertiliser companies to borrow from banks to meet their cash flow requirements, has contributed to the liquidity crunch in the whole system.
It might be argued that such issues may not worry fresh investors in view of the new policy dispensation. The additional urea produced as a result of the fresh funding will be covered under the proposed import parity pricing regime, subject to a fixed floor and ceiling. Considering that the international prices of urea are hovering around $700 a tonne, against a domestic production cost that is only a third of this, the premium that can be booked certainly seems attractive. The catch is that international prices of urea cannot be expected to remain unchanged when India’s domestic supply improves, since India and China are the two big importers of fertiliser and their requirements heavily influence world prices. If domestic urea output rises sufficiently to allow a sharp cut in the country’s import needs, world prices are bound to take a hit. Also significant from the investors’ viewpoint is the pricing of gas for fertiliser units, on which there is as yet no decision — although fertiliser ranks next only to power when it comes to priority for the allotment of gas. In short, until the gas connectivity issue is addressed, and there is greater clarity on the availability and pricing of gas, the chances of new investments materialising in this sector will remain dim.