Fertilisers: Some good news

Proposals to improve the economic viability of farming

Government to offer seed producers a grant or concessional financing in order to double the production of certified seeds within a period of three years

Pass through status to venture capital funds in respect of investments in venture capital undertakings in seed research and development

Implementation of a pilot programme in at least one district in each state to find a method of delivering the fertiliser subsidy directly to the farmers

Hike in the dividend distribution tax from the current 12.5% to 15%

A secondary and higher education cess @ 1% of the aggregate of duties of excise has been imposed on excisable goods. This would be in addition to existing education cess of 2% imposed in budget 2004

Increased allocation towards agriculture will lead to increased demand for fertilisers and seeds

Efforts at improving the subsidy mechanism will make the entire system more efficient and help remove redundancies

The fertiliser sector has a crucial impact on the country's food security. While phosphatic and potassic fertilisers have been decontrolled, nitrogenous fertilisers (urea) remains government-controlled. There remain restrictions on capacity additions for producers.

While we expect fertiliser consumption to grow by around 4% (urea), assuming a normal monsoon, we believe that the major catalyst for the sector will come as and when the government takes steps to deregulate it and remove restrictions on capacities and selling area. While there have been indications of such a thing happening for quite a while now, no specific action has been taken. The over-dependence of agriculture on monsoons is a distinct negative for the industry and to that extent, risks do exist.

Seed manufacturers stand to benefit from not only the concessional financing but also from the massive boost in production of seeds

Dividend distribution tax is likely to have a marginal negative impact on companies that have a track record of dividend payments

Increased investment allocation for agricultural infrastructure.

Subsidy not to be confined to chemical fertilisers alone, but should cover seeds, pesticides, organic manures, and power tillers.

Excise duty on LNG exempted.

Doubling agricultural credit in three years, accelerating the completion of irrigation projects and investing in rural infrastructure.

Under the Bharat Nirman initiative, by 2009, to bring an additional one crore hectares under assured irrigation.

About 1.2 m hectares have been covered under micro-irrigation so far, and the plan is to increase the coverage to 3 m hectares by the end of the Tenth Plan and to 14

Fertiliser subsidy bill estimated for 2005-06 at Rs 162.5 bn (from Rs 156.6 bn as per the revised estimate for 2004-05).

The outlay under the Accelerated Irrigation Benefit Programme (AIBP) has been increased from Rs 45 bn last year to Rs 71.2 bn in FY07, with the Central Government supporting the programme with a grant of Rs 23.5 bn. An additional 600,000 hectares of irrigation potential are expected to be created in FY07.

The target for farm credit has been raised from Rs 1,415 bn in FY06 to Rs 1,750 bn in FY07, with the addition of 5 m farmers envisaged.

Farmers to receive short-term credit at 7%, with an upper limit of Rs 300,000 on the principal amount.

Customs duty on natural gas has been reduced from 10% to 5%.

Low per-capita consumption: India consumes only 98 kgs of nutrients per hectare of arable land as compared to 254 kgs in China, 301 kgs in Japan and 407 kgs in Korea. Several developing nations, including Pakistan and Bangladesh, have higher consumption per hectare at 135 kgs and 156 kgs respectively. Therefore, there is a lot of scope for increasing this consumption to higher levels, given the benefits that fertilisers bring to soil conditions, the quality of crop output and yields.

Increased credit availability: Though credit availability to the agriculture sector has been an issue, various measures have been taken to increase the availability of credit at a cheap rate. The emergence of commodity exchanges and plans on the crop insurance side are steps in the right direction, which are expected to provide a fillip to the agriculture sector. Since fertiliser demand is a function of awareness of usage and availability of organised credit, this is expected to benefit the industry.

Energy efficiency: The Indian fertiliser industry is fairly energy efficient as compared to its international counterparts in China and the US. To put it in numbers, the energy consumption for urea is 6.10 Gcal/MT (giga-calories per metric tonne) in India, as compared to 6.29 Gcal/MT in China, for gas-based feedstock plants. Even for naphtha-based feedstock plants, the energy consumption in India is 6.43 Gcal/MT, as compared to 6.76 Gcal/MT in China. Therefore, in terms of efficiency and conservation of energy, Indian plants are as good as, if not better than, their international counterparts.

Critical to food security: The impetus to provide a boost to the fertiliser sector stems from the fact that the country needs to have food security. Given the rise in population and falling area under cultivation, this is likely to be achieved by improving productivity. Therefore, policy measures are likely to be accelerated on the fertiliser side.

Increased acreage under irrigation: In order to reduce dependence on the monsoons, the Bharat Nirman initiative envisages an additional 10 m hectares to be brought under assured irrigation by 2009. This will certainly benefit the fertiliser sector, as increased usage becomes imperative in order to improve yields.

Political intervention: Since the farmer lobby is a large vote bank, both at the Centre and at the state level, there has been a hesitancy to take hard decisions. The fact that food security is such an important goal and the possible volatility in fertiliser prices if they are brought under decontrol, resulting in lower usage, has also led to the political control of the sector. This has been affecting the growth of the sector.

Unclear policy environment: The sector is a highly controlled one (cap on capacity, prices, selling markets and return generation). The lack of incentive to cost-efficient producers as compared to incompetent players has been affecting not only the industry fortunes but also the government's finances.

Over dependence on the monsoons: The fertiliser industry, being dependent on agricultural growth, is therefore, very dependent on the monsoons. Agriculture is still far too dependent on this one variable, with not enough land under irrigation. Therefore, the fertiliser industry is not favourably placed on this count.

Gas de-regulation: Natural gas is one of the most cost-efficient sources of energy for the fertiliser industry. But since gas prices are controlled in India, fertiliser manufacturers have been benefiting. Considering the imminent deregulation in the gas sector, there could be a sharp rise in input costs. The availability of gas at competitive rates is also an issue that needs to be addressed with high priority.