In April 2010, the prices of other fertilisers were decontrolled, which caused a sharp rise in their prices. However, the administered price of urea has been raised only marginally. As a result, farmers began using much more urea than they did other fertilisers. Essentially, the incorrect pricing distorted farmers' choices - and now threatens to upset the chemical profile of the soil. The damage could be long-lasting. The heavy demand drove urea into short supply, which created a black market for the commodity. It is also possible that urea, being significantly cheaper in India than elsewhere in the world, may have been smuggled out to neighbouring countries or diverted to some other use within the country. Such distortions can not be addressed through additional controls; market-determined prices can solve these problems much more effectively. The reform will also help the government trim its fertilisers subsidy bill, almost two-thirds of which is accounted for by urea.
Under the current fertiliser policy, the government pays the subsidy to the urea producers, not to the farmers, on a cost-plus basis. Critics have long pointed out that this robs the industry of any incentive to become efficient. There is huge excess capacity in the industry. The cost of producing urea varies widely in the country: from Rs 11,000 a tonne to Rs 41,000 a tonne. If the subsidy regime is overhauled, inefficient units will have no option but to shape up. Urea producers that use domestic gas, which is available at $5-6 a million British thermal units (mBtu), are naturally at an advantage vis-à-vis those that use imported gas after paying a higher price. Besides, some of the old plants are gas guzzlers, while the new ones are efficient and use less gas to produce the same amount of urea. It has been reported that the government could look at some kind of gas pooling that will give the old plants as well as those dependent on imported gas the space to survive.
This will be unwise. It runs counter to the logic of decontrol, in that it prevents market forces from operating properly. There is no reason why the plants that use domestic gas should be penalised for the survival of the old and inefficient ones. The old plants are fully depreciated and have recovered their capital costs. There is no need to give them any incentive to prolong their lives. For the country to have a robust fertiliser industry, it is essential to remove all such distortion-causing interventions. If decontrol is on its mind, the government should go the whole hog and not leave it midway.