Cabinet bites the bullet, raises urea prices 10 %

Barely a week before the Union Budget for 2010-11, the United Progressive Alliance government on Thursday raised urea prices 10 percent.

It also allowed the industry to fix retail prices of other subsidised fertilisers, while limiting the government's subsidy burden under a new policy that will determine the subsidy on phosphorus and potash based on their nutrients.

The decision, to take effect from April 1, will help the government reduce its fertiliser subsidy bill, estimated at Rs 50,000 crore for the current year.

But, the move will hit farmers, a key aam-aadmi constituency of the UPA government, even as fertiliser companies will stand to gain. Stock prices of top fertiliser companies went up 2 to 4.5 percent in late trading on Thursday.

Decisions on raising fertiliser prices have always been controversial and today's decision was no different, with key UPA constituents expressing strong disagreement. Fertiliser minister M K Alagiri was opposed to the move and had asked Finance Minister Pranab Mukherjee to defer the decision. The government has, however, been keen to introduce the new policy for the past year.

The decisions, taken at a meeting of the Cabinet Committee on Economic Affairs, do away with the practice of government fixing a maximum retail price and aims at replacing the current system of giving subsidy to the industry with direct assistance to farmers.

Announcing the new policy, information and broadcasting minister Ambika Soni said urea prices would rise by Rs 483 per tonne. The maximum retail price of urea is currently Rs 4,830 a tonne, while DAP (diammonia phosphate) costs Rs 9,350 a tonne and MOP (muriate of potash) Rs 4,455 a tonne. Urea prices were last raised in 2001 by five percent.

The switch to the nutrient-based fertiliser plan is significant as companies will now be able to change retail prices of only nutrient-based fertilisers (eg nitrogen, phosphorus, potash and sulphur), which will help the government cap the subsidy on these fertilisers.

The government's move is also expected to attract fresh investment in the fertiliser industry.

The government's annual subsidy bill on fertilisers in 2008-09 was estimated at Rs 75,849 crore, which was expected to be brought down to Rs 49,980 crore in the current year.

The bulk of the increase in the fertiliser subsidy is on account of the sale of decontrolled fertiliser with concession to farmers. Urea accounts for about 30 percent of the total fertiliser subsidy burden. In the upcoming budget for 2010-11, the government is expected to prune large-scale subsidies pertaining to the fertiliser and oil sectors. Fertiliser companies, however, have assured no price increase in the current fiscal year.

"The price rise will not have any impact on the margins of the companies though the farmers will have to pay a higher price now," said Sangeeta Tripathi, research analyst, Sharekhan. "The shift to nutrient-based subsidy will not have much impact on the government's subsidy. It would depend on how much subsidy is fixed for each nutrient."

The industry, however, welcomed the decision. "The nutrient based subsidy policy is very encouraging and would help bringing much needed succor to farmers as well as fertiliser sector. Besides reducing fertiliser subsidy, the new policy shall assist in improving the soil health through balanced and integrated use of nutrients, including secondary and micro-nutrients. It also provides incentive to fortify the fertilisers with micro nutrients to mitigate their deficiencies, thereby assist enhanced productivity," said US Awasthi, managing director, Indian Farmers Fertiliser Cooperative Limited.

He also added that the new policy would attract investment in the fertiliser sector that had remained stagnant for several years.

In the early 1990s, Manmohan Singh as finance minister had proposed to raise fertiliser prices by slashing government subsidy, but faced stiff opposition from Congress leaders and had to mollify them by adjusting the extent of the price increase.