In what could give the finance ministry an option to narrow down the fiscal deficit in the Budget next month, a group of ministers on Friday cleared an investment policy for urea aimed at reducing the government's subsidy burden. However, analysts did not quantify the exact impact on the subsidy outgo of the government because of the policy, saying it would be clear once production from new investment began. The government will, nonetheless, take this into account while estimating its fertiliser subsidy in the Budget for 2012-13, to be tabled on March 16, they say. This financial year, the fertiliser burden is expected to cross Rs 90,000 crore, against nearly Rs 49,000 crore estimated in the Budget.
The new policy that aims at enhancing domestic production of urea makes a distinction between new capacity and expansion of the existing capacity while fixing cost bands for subsidy, which remained unclear after the investment policy of 2008.
As per the new policy, the floor and ceiling cost of production for greenfield investments has been fixed at $310 and $340 a tonne, respectively. For brownfield expansion, the floor and ceiling costs have been kept at $290 and $320 a tonne, respectively. The government in 2008 had announced a 'New Investment Policy', with floor and ceiling prices of $250 and $425 a tonne for all projects. The scheme failed to attract fresh investments despite an assurance of prioritised natural gas supply.
The government offers subsidy only when the cost of production remains within the stipulated band. Since the band has now been narrowed by raising the floor and reducing the ceiling, the government hopes to save on its subsidy bill. However, the brownfield expansions made under the 2008 policy will continue to get subsidy under those rules only.
According to a senior official close to the development, the suggestions given by the committee of secretaries (CoS) headed by Planning commission member Saumitra Chaudhary have been approved by the GoM chaired by Finance Minister Pranab Mukherjee. The draft policy will now go to the Cabinet Committee on Economic Affairs (CCEA) for final clearance. With gas being the main feedstock of urea and accounting for the major portion of the cost of production, the draft policy had suggested the government bear the entire cost of gas till $14 per million British thermal unit (mmbtu).
Though the change in the floor and ceiling prices for subsidising urea manufacturers is intended at reducing the subsidy burden, analysts feel it will show an impact on subsidy only when new investments start yielding results. At the same time, the price of natural gas and LNG at that time would also have an impact. "The exact impact of the policy on subsidy outgo will depend on the price of gas at the time production begins from new investments," said Suresh Krishnan, MD and CEO of Zuari Industries.
India has urea consumption of around 28 million tonnes at present, of which 22 million tonnes is domestically produced. There has not been fresh greenfield investment in urea for over 13 years.