The Cabinet Committee on Economic Affairs (CCEA) today cleared the new investment policy for urea, offering huge incentives for companies to set up new urea plants as well as to expand capacity.
With the new policy, the government expects to attract investments worth Rs 35,000 crore to the sector. As the policy is aimed mainly at increasing production, it is unlikely to have an impact on urea prices.
The last greenfield investment in the sector came in 1999.
The fertiliser industry had recently said that the new policy would turn out to be crucial in fulfilling the gap of domestic urea production.
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R G Rajan, chairman and managing director of Rashtriya Chemicals and Fertlisers (RCF) and chairman of the Fertiliser Association of India (FAI) had said that the urea policy was expected to be in place soon and investments to augment 8 million tonnes capacity were lined up.
The policy was approved by the Group of Ministers in February. However, at that time the industry responded coldly saying that the cap on gas price of $14 per million British thermal units (mmBtu) for urea plants was not making capacity expansion more attractive.
According to Rajan, appropriate changes have been incorporated in the policy now. The industry had been demanding that the cap be raised to $20.
The government had announced an investment policy for urea in 2008, to boost urea production. However, the scheme failed to attract fresh investment in the sector.
India currently faces shortage of close to 8 million tonnes of urea, which is met through imports. Of the total urea consumption of over 30 million tonnes in the country, about 22 million tonnes is domestically produced, while the rest is imported.
In the new policy, the fertilizer ministry has recommended 12-20 per cent post-tax return on fresh capital infused by manufacturers for setting up of new plants, expansion and revamping existing ones.
To ensure this return, the ministry has decided to cover the entire cost of the natural gas, which is main feedstock of urea accounting for 80 per cent of the total cost.
The government currently controls the urea sector and has fixed a maximum retail price (MRP) at Rs 5,360 per tonne.
To determine the cost of production of new plants to be set up after the policy comes into effect, the ministry has set a floor and ceiling price of urea, based on the price of natural gas.
Currently, urea producers are given a 12 per cent post tax return above the cost of production to sell the major crop nutrient at subsidised rates to farmers.