The recent decision by the empowered group of ministers (EGoM) to free urea prices and bring urea under the nutrient-based subsidy (NBS) regime should have been taken along with the decontrol of phosphatic and potassic fertilisers in April 2010, if not earlier. In fact, the process of switching over to the well-conceived NBS system has been inconclusive without urea being covered in it. As a result, most of the key objectives of this move have remained unmet. These include promoting balanced application of plant nutrients to preserve soil health, encouraging production of innovative and situation-specific fertiliser products, rationalising fertiliser subsidy and attracting fresh investment in this sector. Surprisingly, though most of the ministries concerned – including those of agriculture and finance – favoured extending NBS to urea, the main administrative ministry, the fertiliser ministry, continued to have misgivings about it. Its main worry was that it would lead to an abnormal rise in farm gate rates of urea which might hurt farmers. However, the fact is that the rise in prices, though inevitable, would not be unreasonable since the government is not abandoning the policy of subsiding fertilisers to keep retail prices lower than the production cost. The EGoM has now decided to allow a maximum of 10 per cent increase in urea prices in the first year of decontrol, after which firms would be free to fix prices in a competitive market. For calculating subsidy under NBS for urea units using different feedstock and of varying vintage, the committee of secretaries, headed by Planning Commission member Saumitra Chaudhuri, has suggested a useful formula to the government.
However, decontrolling urea prices is only the first step in the urea sector reform. To take this process to its logical end, the government will have to address the issue of supply and pricing of gas for fertiliser production and draw up a policy to end the nearly decade-old drought of fresh investment in capacity addition. The Saumitra Chaudhuri committee report can be useful for this purpose. One suggestion that merits consideration is notional pooling of natural gas prices. This will ensure contracted prices for the public and private sector gas suppliers and a uniform feedstock cost for a level playing field for all urea units, regardless of their technology and age. The uncertainty about sustainable gas availability at reasonable prices has, in fact, been one of the reasons for the failure of the government’s 2008 investment policy to attract fresh funding in this sector. Of course, there have been concerns about the implementation of the policy on parity pricing for imported urea. Since urea is a highly capital-intensive industry, investors seek assured and adequate gas availability and reasonable returns. For this, the new and expansion projects may also need some fiscal sops, such as infrastructure status or a tax holiday or concessions for the first few years. Addressing these issues would help reduce India’s import dependence in urea.