Why inflation hasn’t hit urea

Indian urea prices have responded neither to costs nor to global trends

Thought inflation had pegged up the prices of anything and everything? Not really.

Urea, the nitrogenous fertiliser most used by Indian farmers, is an exception. Consider its price trends. For eight long years from 2002 to 2010, the selling price of urea was kept unchanged at ₹4,830 a tonne.

It then rose by a meagre 10 per cent to ₹5,310 in 2010. After a two-year interval, the government raised the urea sale price by ₹50 per tonne to ₹5,360 (that is, about $86) in 2012.

Thereafter, there has been no further increase. In India, urea sells at less than a fourth of its price in the global market.

Subsidy burden

The price of a tonne of urea in the West Asian region now rules at about $365; it touched a high of $600 in mid-2012.

Thanks to the controlled sale price in India, the disconnect between domestic and international urea prices has widened over the years.

For Indian farmers, the term urea is almost synonymous with fertiliser. Thanks to the massive subsidy provided by the government, urea is now the cheapest fertiliser in India. This has led to its excessive use by Indian farmers.

Urea now accounts for over half of the country’s total fertiliser consumption, higher than the global average of 40 per cent.

From 19.1 million tonnes in 2000-01, urea consumption has risen 57 per cent to 30.16 million tonnes by 2012-13.

While the sale price of urea is decided by the government and remains much below the cost of production, the difference between the cost and the sale price is paid by the government to urea producers as subsidy.

The domestic urea price has failed to keep pace with the movement in the prices of underlying raw materials too.

While the cost of inputs such as natural gas and naphtha has risen multi-fold over the last decade, the sale price of urea has been raised by a paltry 11 per cent. Almost 70-80 per cent of the production cost is borne by the government as subsidy.

The domestic production cost ranges between ₹12,000 and ₹25,000 a tonne.

In the case of complex fertilisers, which contain a combination of nitrogen, phosphorous and potassium (NPK), the subsidy is not as high. Farmers bear 70-80 per cent of the total production cost.

In 2010, the government de-controlled the selling prices of complex fertilisers such as DAP (di-ammonium phosphate), and introduced a nutrient-based subsidy (NBS).

Under the NBS policy, the government fixes a flat subsidy per tonne payable on various grades of complex fertilisers every year and producers are allowed to decide on the selling price that will help them recover the balance from farmers.

As complex fertiliser subsidies have been kept under check, the prices of complex fertilisers have risen three-fold since their decontrol in 2010.

In contrast, the selling price of urea has not kept pace even with inflation.

Even as the government has made several Budget announcements regarding decontrol of urea selling prices, there is no concrete framework yet.

Stagnant production

The wide price differential between urea and other complex fertilisers has prompted farmers to switch to the former.

Even as the demand for urea has surged incessantly over the past few years, there have been no major capacity additions, leading to stagnant domestic production.

Uncertainty about continuing subsidies and lack of clarity on gas availability have deterred additional investment in this sector.

India imports almost 30 per cent of its urea requirement.

Higher imports, coupled with the steep rise in international prices and a weak currency, have inflated the country’s fertiliser subsidy bill.

From about ₹11,800 crore in 2002-03, the subsidy on urea has burgeoned to over ₹48,300 crore budgeted for 2014-15.

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