Seeking balance between controlled, skewed pricing in favour of urea

Some in the industry fear a return of controls while others see positives in a govt circular, but the bigger issue is the skewed pricing in favour of urea

A few days back, the Ministry of Chemicals and Fertilisers issued an office memorandum that sought to cap the profit margin on the retail sale price of phosphate and potassic fertilisers charged by companies under the Nutrient-Based Subsidy (NBS) regime.
 

Di-ammonia phosphate (DAP), Muriate of Potash (MOP), and different grades of NPK (nitrogen, phosphorus, potassium) are the most commonly used non-urea fertilisers in the country. DAP is the second most-consumed. For urea, the largest consum­ed fertiliser, no such margin control has been proposed as it is already sold at a fixed rate that has not been revised for more than a decade.
 

The ministry’s recent memorandum allows companies to charge profit over their total cost, including cost of production and a host of other items, or import according to three slabs. The profit will be calculated retrospectively from April 1, 2023.
 

Companies will have to refund any “unreasonable profit” they might have made, to the department of fertiliser by October 10 for the previous financial year. If they do not, interest at the rate of 12 per cent per annum on a pro-rata basis will be charged on the refund amount from the first day of the new financial year. For FY24, interest will be charged from April 1, 2024.
 

Companies have been also told to self-assess their reaso­nable profit based on the cost auditors report along with the audited cost data as approved by their Board of Directors. If a company does not submit the cost auditors report, its further subsidy could be stopped and a penalty levied.
 

Unfounded fears?
 

The circular has sparked fear in a section of the fertiliser industry that the new circular could mark a return to the controls that were eased by the NBS regime when it was introduced in April 2010 for non-urea fertilisers.
 

However, some experts say the circular will in fact simpl­i­fy things. The Centre has been fixing “reasonableness of MRP or profit” since 2019, when it allowed firms to char­ge a uniform 12 per cent margin, including GST, over the cost of production irrespect­ive of whether the DAP or MOP was made in India or imported.
 

Even when the NBS regime was introduced, though it theoretically provided companies the freedom to price their non-urea fertiliser, firms had to regularly provide details of the retail sale prices to the government.
 

“There are no additional controls. On the contrary, the memorandum simplifies lots of things. First is that the ind­ustry has been demanding that instead of defining ‘reas­onable profit margin’ prod­uct-wise the entire segment sho­uld be considered as one unit for fixing ‘reasonablen­ess’, which they have done. This will help the industry be­cause if someone charges more for a product but less for another, it will now get balan­ced. This is in favour of the in­dustry,” says S Nand, a sector expert.
 

Secondly, GST has been ex­­cluded, which, Nand says, favours domestic manufacturers of non-urea fertilisers. And third, the differential pricing slabs will give a boost to the Make in India initiative. “The only thing is that the informal pricing control on DAP, MOP and NPKS-grades introduced since Covid-19 still remains,” Nand said.

 

Skewed pricing
 

The more pertinent question to address, say several exp­erts, is the pricing in favour of urea. India’s subsidy matrix has ensured that the NPK ratio in the 2023 Kharif sowing season has remained abnormally high in favour of nitrogen and against an ideal NPK ratio of 4:2:1. It is now 10.9:4.9:1, shows data from the Fertilizer Association of India.
 

The NPK ratio was somewhere right around 2009-10, when it touched 4:3.2:1. The unchanged retail price of urea, as compared to other fertilisers, makes it the cheapest plant nutrient available to Indian farmers. Exp­erts att­r­i­bute this to the subsidy regi­me, wherein almost 90 per cent of the production cost of a bag of urea is subsi­d­ies and the retail price has not been raised for more than 10 years, while the price of all other fertilisers has been revised.
 

Bringing urea under the NBS regime could be the solution. In 2022-23, of the tot­al consumed 64 million ton­nes of fertiliser in India, urea made up 56 per cent.
 

The Commission for Agri­culture Costs and Prices, the government’s panel to fix MSP, in its latest kharif report, has flagged this by saying fertiliser response and efficiency have continuously declined over the decades mainly due to imbalanced use of nutrients, deficiency of micro and secondary nutrients, and depletion of soil organic carbon, while the fertiliser subsidy has been rising.
 

The Commission recomm­ends steps to bring urea under the NBS regime to address the imbalanced use of nutrients.