Fertilizers

Long Term Fertilizer Policy

At the initiative of the minister, a new long term fertilizer policy has been drafted which, while looking after the interests of the farmers, aims to remove all the aberrations which have come in the RPS Scheme. While this scheme played a very notable role in increasing production and consumption of fertilizers in the country, several aberrations have crept into it over a period of time. It has resulted in a lack of competitive environment and is also out of tune with the current philosophy of economic liberalization.

The draft long term Fertilizer Policy has been placed on the internet and all stockholders like industries, farmers associations, other Central Government Departments, State Government Departments., State Government Departments, NGOs etc. are being consulted through road shows. The new fertilizer sector in a phased manner. The draft long term fertilizer sector in a phased manner. The draft long term fertilizer Policy has the following salient features:

	Removal of aberrations and deficiencies in the existing pricing policy of urea.
	Increase in price of urea at regular intervals.
	Improvement in the implementation of the concession scheme.
	Feedstock Policy-Switch over to LNG and feasibility of coal-based technology.
	Joint venture policy;
	New Pricing policy for urea Units.
	Policy towards creation of new capacity;
	WTO Related Matters.
	Removal of distribution controls on Urea.
	New Role of the Regulator.

Correction in Retention Price-cum-Subsidy Scheme

The Retention Price-cum-Subsidy Scheme (RPS) has been the mainstay of growth of the fertilizer sector from 1977 onwards when it was first notified following the recommendations of the Marathe Committee and this has contributed to a sharp growth in the production of nitrogenous fertilizer in the country. From 12.83 million MTs of urea production in 1991-92, the actual production went up to 19.87 million MTs in 1999-2000. It is significant to note that the production level of 19.87 million tonnes though in itself a creditable achievement was achieved with a declared installed capacity of 18.66 million MTs. There was palpably understatement of this capacity by some of the urea manufacturing units leading to higher subsidy outgo and unintended gains. This aberration in the Retention Price-cum-Subsidy Scheme which is commonly referred to as gold plating has been critically commenced upon in successive reports of the Standing Committee of the Parliament. The Government was about to recover excess subsidies and also to initiate penal action if so required after due examination. This problem had remained unresolved for over eight years. It was first mentioned in the report of the Joint Parliamentary Committee on Fertilizer Prices submitted in 1992. Thereafter, Government had set up two Expert Committees in succession to recommend the course of action with regards to reassessment of capacities of urea manufacturing units which were receiving undue benefit under the RPS by understatement of capacities. The report of the latest Expert Committee headed by Dr. Purohit, could not give a unanimous recommendation even after detailed examination and analysis of unit-to-unit production data for past over five years. To find a final solution to this, the Government has now set up a Committee headed by Dr. Y.K. Alagh, who is an eminent Economist and has held senior positions in the Government. The Committee headed by Dr.Y.K. Alagh will has Dr. Arvind Virmani, Additional Chief Economic Advisor in the Department of Expenditure, as the other Member. Committee is going into the entire issue of reassessment of capacity and quantifying the amount of recoveries that shall be effected without seriously impinging on the health of urea industry. This Committee is expected to submit its report soon.

As a concurrent action, the matter has been referred to Central Bureau of Investigation (CBI) for assessing the evidence available on record with regard to understatement of capacity and drawal of excess subsidy to see whether penal action can be initiated against the defaulting units as per provisions of Indian Penal Code. Notwithstanding this as an interim measure, Department of Fertilizers has accepted reassessment of capacity of urea producing units under method IV of expert committee and given effect to it from 1.4.2000. The interim reassessment of capacity has resulted in correction of the installed capacity from 186 Lakhs MTs to 207 :akhs MTs with corresponding subsidy savings of over Rs,500 Crore of this Rs,367 crore will accrue only from the recent gas based units alone which have been a cause of high capacity action is directed against units which had reportedly understated their production capacities.

Task Force on WTO

The fertilizer industry has to gear up to the change which will follow the removal of quantitative restrictions on urea from 01.04.2001. The indigenous urea industry has thus for been protected from the threat as these (imports) canalised and made on account of the Governments. This situation may undergo a change after 1.4.2001 when the indigenous manufacturers of urea will exposed to the competition from urea manufacturers in the Middle East, CIS countries and other manufacturers.

The Task Force will evaluate the provisions of the agreement on agriculture and other WTO agreements which may impact on the fertilizer sector in the context of removal of quantitative restrictions. The Task Force will study and recommend the options available for maintaining the minimum required level of self-sufficiency of fertilizers in the interest of food security of the country. It will also give its suggestions regarding the bound tariff rates on urea and revision in the bound rate of DAP taking into account the need to protect the domestic industry without compromising with its efficiency and competitive character.

Task Force on Coal

The availability and price of feedstocks have a determining role in the growth and development of fertilizer industry. Naphtha was the major feedstock for fertilizer units set up in seventies for production of nitrogenous fertilizers. After that, natural gas emerged as the preferred feedstock in eighties and nineties with the new finds in Bombay High. About 65% of the installed capacity of nitrogenous fertilizers today is based on natural gas. However, a re-look is necessary because of the dwindling supply and share increase in the prices of naphtha following the dismantling of administered price mechanism for fuel and natural gas. the through use of coal bed methane and gas hydried which have long term potentials in this regard are at preliminary stage. Against this coal reserves in the country are estimated to be 206.239 billion tonnes. These can last for more than 100 years at the estimated annual demand of about 412.20 million tonnes. Cost of energy using coal as feedstock is lowest at Rs.188 per G.Cal. (as against Rs.704, Rs.595 and Rs.373 per G.Cal. for naphtha, fuel oil and natural gas respectively). This is, however, to be counterbalanced by the high investment of Rs.2250 crore in case a coal based plant of standard size vis-a-vis Rs.1500 crore in case of plant based LNG and Rs.1650 crore in case of naphtha. Proven technology for use of coal as feedstock in fertilizer sector is available and has been successfully tested in China and Japan. Both the Joint Parliamentary Committee and the High Powered Committee on Fertilizer Pricing have recommended exploration of coal based technology in view of its overall advantages.

It is in this context that a high level Task Force headed by Secretary, Department of fertilzers has been setup on 7th March, 2000. The Task Force has nominations from Ministry of Science & Technology, Ministry of Coal, Ministry of Power, Fertilizer Association of India (FAI), Council of Scientific and Industrial Research (CSIR) and Projects & Development India Ltd. (PDIL) The Task Force shall explore the possibility of using coal and coal bed methane in the fertilizer sector and to suggest a policy outline for the development of further capacities on Coal. It will also outline the incentives required for development of R&D in the field of coal based technology. The Task Force has initiated its deliberations and will soon submit its report.

To focus attention of the Industry on this important aspect, a national seminar on utilisation of coal for fertilizer sector has been organised by the Department of Fertilizers on July 7, 2000 at Nagpur.

Turnaround of sick PSUs in the fertilizer sector

Department of Fertilizer (DOF) has taken initiatives in regard to the sick fertilizer companies. Government of India has been spending annually approx. Rs.300 crore by way of non-plan assistance for salaries and wages and preservation charges for the sick companies of HFC, FCI and PPCL of which most of the operating units, barring Namrup (HFC) and Sindri (FCI), have been closed. The accumulated losses of HFC are at a staggering Rs.4209 crore and FCI are Rs.5862 crore as on (31.3.2000). Both these companies have much larger problem of idle manpower. HFC has a workforce of over 7600 while FCI has over 6000.

Having regard to this, the department has taken a decision at the initiative of Minister (C&F) to prepare a status paper on sickness in the fertilizer sector. The status paper will focus on the sick fertiliser companies in public sector namely of FCI, HFC, PPCL and PDIL. A renowned Consultant namely, Credit Analysis and Research Ltd. (CARE), has been engaged to assist the Department in preparing a paper. The status paper will overview of the fertilizer industry, industrial sickness in the country, sickness in the fertilizer sector, preservation/closure of fertilizer units, reasons for sickness/closure, unit specific case status, etc. It will also refer to previous studies, figures of plan and non-plan support extended to the sick companies by the Government and will have a chapter on feasibility of turnaround of sick units. The status paper will also spell out the action to be taken for rationalisation of manpower and cover the strategies for the future which will look into the feedstock options like LNG and Coal with focus on Eastern Region which account for most of the sick companies in the fertilizer sector.

Transparency in the working of Department of Fertilizers

As a measure of increased transparency, the Department has initiated number of actions which include putting the relevant information on the web site. Fertilizer home page has been created in English as well as in Hindi and has been placed at web site address as http//fert.nic.in to enable access for internet users. The web site covers the list of subjects allocated to the DOF, organisational set up, fertilizer companies under the administrative control of the DOF. It includes fertilizer company profiles and incorporates the E-mail Addresses/Web Site Links to these companies. The features of the existing policy are also included in the Web Site. The Site covers Procedure for Import of Urea, Guidelines for Export of Single Super Phosphate, Annual Report of the Department, Statistical Data pertaining to Prices, Fertilizer Production, Movement, Consumption and Imports. The site also gives the useful links related to the fertilizer sector including the Lok Sabha/Rajya Sabha Secretariat for Parliament Questions.

Joint Ventures Abroad

Due to constraints in the availability of gas, which is the preferred feedstock for the production of nitrogenous fertilizers, and the near total dependence of the country on imported raw materials for production of phosphatic fertilizers, the Government has been encouraging Indian companies to establish joint venture facilities in other countries, which have rich reserves of natural gas, rock phosphate and potash.

Following this approach, Government have approved investment of US $ 80 million each by KRIBHCO and IFFCO for setting up a joint venture nitrogenous fertilizer plant in Oman on 20.6.2000. This project has been conceived on account of the following socio-economic benefits to our country:

	Availability of gas at cheaper price than that of domestic price
	Reduce the subsidy burden
	Ensure availability of urea to the extent of 16.52 LMT per annum under a direct Urea Offtake Agreement for a period of 15 years at long-term prices
	Strengthen mutual relations with Oman both in political and geo-strategic terms
	Further, with a view to finalise the long-term policy for setting up joint ventures abroad, Government have recently constituted a Task force under the Chairmanship of Secretary (Fertilizers) consisting representatives of Ministry of External Affairs, Ministry of Petroleum & Natural Gas, Ministry of Commerce, Fertilizer Association of India and Fertilizer Industry. The Task Force has been asked to submit its report within a period of six months

Initiative taken on Research and Development

After a review of the ongoing efforts on research and development in the Fertilizer Industry, it was felt that focussed attention was required to identify possible areas of research, operationalise research in identified areas and explore options of financing research projects. It was also felt that a close monitoring of ongoing research was necessary. After discussion with representative of various of organisations such as CSIR, IIT, Department of Science and Technology, etc., it was felt that effective research could be carried out in both basic science and applied areas. Further, need for research in allied areas such as fertilizer use efficiency, crop response ratio, farmers' extension programmes, etc. was recognised.

At the initiative of Minister of Chemicals & Fertilizers (C&F), a high level Committee to be headed by Secretary Department of Fertilizers with representative from CSIR, ICAR, Department of Science and Technology, Fertilizer Companies and Research Organisations is proposed to be set up to examine the hole range of issues in R&D. It is already decided that research and development would be made one of the areas for performance evaluation of Public Sector Enterprise. All PSUs/Cooperatives would be asked to separate budget for R&D activities and appoint Board Level Committees for monitoring performance in this area. A mechanism is being worked out in association with IIT Delhi to enable effective sharing of information between fertilizer companies and Research Organisations both on the latest development in the field of R&D and on the specific requirements of industry.

New Fertilizer Projects

Investment appraisal of the following mega fertilizer projects was undertaken:

	Hazira Expansion Project of KRIBHCO
	Thal Expansion Project of RCF
	A new ammonia urea plant at Gorakhpur to be set up by KRIBHCO at the site of FCI’s old plants.
	Grass roots ammonia urea project to be set up at Nellore by IFFCO.

After the investment appraisal, the Department played an active role in resolving the difference in perception among various agencies, on the number of projects required, keeping in view the likely demand supply gap from the year 2003 onwards. The final proposal for approval of investment has been processed after the necessary inter-ministerial consultations and has been placed for consideration of the Cabinet Committee on Economic Affairs. The proposal would go a long way in attaining self-sufficiency in urea production at the same time leaving sufficient room to take full benefit of the prevailing low international urea prices.

Promotion of alternative fertilizer

There is a growing realisation that the use of chemical fertilizers needs to be supplemented by alternate form of fertilizers such as bio fertilizers and organic fertilizers. Promotion of alternate fertilizers has been considered a thrust area in view of its distinct advantages, such as low cost environmental protection etc. The Minister of Fertilizers has formed the Committee with representatives from Department of Agriculture, FAI, ICAR, Ministry of Urban Affairs, some fertilizer companies and user organisations. The Committee will look into the following issues:-

	Need of specific thrust of bio fertilizers for specific crops and specific areas.
	Need of greater interaction with the agriculture universities.
	Identify and implement mechanism of quality control.
	Promote research and development efforts to increase shelf life of bio fertilizers.
	Provide adequate testing laboratories at major user centres.
	Promote awareness by educating farmers on the benefits of such fertilizers.
	Explore the mechanism for using bio mass including urban waste to make organic fertilizer.
	Need to bring together buyers and sellers to develop organic fertilizers.

It is also carrying out the detailed study on bio fertilizers and bio mass including assessment of ground realities to get an accurate picture of demand in each State.

11. Policy regarding new grassroot urea projects:

A policy decision has been taken regarding creation of new capacities of urea in the fertilizer sector. Fertilizer industry is delicensed and as on date promoters are free to set up fertilizer plants once they get clearance for feedstock allocation. The High Powered Review Committee on Fertilizer pricing Policy (HPC) had recommended that new urea units might be justified only on strategic consideration of desirable minimum level of self-sufficiency as India has no comparative cost advantage in urea production. Urea is under Retention Pricing Scheme and any new unit means a heavy outgo by way of subsidy. The issue has become more urgent in the context of highly reduced gap between demand and supply. Country is now more or less self-sufficient in the field of urea production and for the past two years, urea imports have been reduced to the minimum accounting for only about 2% of the total consumption. Imported urea is available at much cheaper rates than subsidised urea being produced in the country. The Deptt. of Fertilizers has, therefore, decided the following:-

	No new grassroot project for production of urea to be set up in the public, private and cooperative sector for the next three years except those public/cooperative sector projects already proposed for consideration by the CCEA, till the 2003-04.
	In view of the gestation period of three years of commissioning a urea plant, Deptt. of Fertilizers will review the position with regard to the creation of new capacities only in April 2001.
	New units will get no guarantee about continuance of existing Retention Price Scheme on a long term basis but may be given subsidy support on the basis of Long Range Marginal Cost worked out on the basis of LNG/gas as feedstock. They will get the benefit of the retention pricing scheme only as long as it lasts.

Joint ventures abroad for mining of potash

While India has become almost self-sufficient in production of urea and has achieved a comfortable level of self-sufficiency in phosphatic fertilizers, it is totally dependent on imports as far as potassic fertilizers are concerned. It was, therefore, decided by the DOF that India should set up joint ventures abroad in countries having abundant reserves of potash to enable the country to have assured sources of supply of potassic fertilizers. In pursuance of this, IFFCO and Indian Potash Ltd.(IPL) are exploring a joint venture in Argentina with an Argentinian joint venture partner. Krishak Bharati Cooperative Ltd.(KRIBHCO) has also initiated action to explore the possibilities of mining the potassic reserves in Lao PDR. These joint ventures are at very initial stages but are being pursued vigorously and will mark a new chapter in India's self-sufficiency with regard to availability of fertilizers.

Policy Initiatives with regard to exports and imports of urea

Another initiative taken pertains to promoting indigenously produced urea for use in manufacture of complex fertilizers in substitution of imported urea. The manufacturers of complex fertilizers in the country used to import about 6 lakh tonnes of urea per annum in view of the low prices of imported urea for converting into complex fertilizers in their plants. As a measure of the new initiative, these complex fertilizers manufacturers have been directed to use the indigenously produced urea available in the country in excess of that required for internal consumption by procuring it from indigenous producers at import parity prices. This measure will allow extra production to indigenous urea producing units while at the same time will curb the outgo of foreign exchange by substituting the imported urea.

Indigenous urea manufacturers have also been asked to explore possibilities of exporting urea especially to neighbouring countries subject to clearance on case-to-case basis by the Department of Fertilizers.

Handling Emergencies

There was no effect on the movement and availability of fertilizers following the transporters strike in October, 1999. All States received sufficient availability of major fertilizers – Urea, Di-Ammonium Phosphate (DAP) and Muriate of Potash (MOP). This was due to the movement of sizeable quantity during the first three weeks of November. At the behest of Minister, a control room was setup in Delhi which maintained close liaison with the State Governments and monitored the situation.

KANDLA EXPANSION PROJECT LAUNCHED

The Second Phase of the Indian Farmers’ Fertilizer Cooperative Ltd.(IFFCO) Kandla Expansion Plant was dedicated to the nation by the union Home Minister, Shri L.K. Advani. The Minister of Chemicals and Fertilizers presided over the function. Complimenting IFFCO for becoming the world’s largest cooperative fertilizer manufacturer. Shri Prabhu called on the cooperative sector to prepare its "VISION 2050" and set up R&D facilities to incorporate latest technologies and produce agro-chemicals and fertilizers based on research.

Simplification in techno-economic clearance for project imports for fertilizer sector.

Existing departmental guidelines for granting techno-economic clearance (TEC) to the renovation/modernisation schemes and attestation of list of imported goods for (substantial expansion/setting up of new) fertilizer projects for availing custom duty benefit have been modified with a view to simplify the procedure and to facilitate early attestation and tech-economic clearance and to provide greater transparency. This is intended to be a major step towards rationalisation of policy of capital investment in the fertilizer sector. The existing system of one stage clearance has been substituted by as system of two stage clearance. At the first stage only the essentiality of the proposal would be scrutinised on the basis of the estimated costs of the project imports. Companies, however, will thereafter be expected to procure the goods on the basis of competitive bidding to ensure reasonability of prices. Proprietary goods will be exempted from competitive bidding process. Policy has been further liberalised for composite units manufacturing both chemicals and fertilizers. Concessional customs duties are admissible only for project imports of fertilizer plants. This created problems in relation to composite units. It has, therefore, been decided in the new policy that in the case of composite units which manufacture both chemicals and fertilizers, concessional customs duty should be available on proportionate basis on the quantum of ammonia or any other intermediate product which is used for production of fertilizers subject to one condition only that the percentage of production for fertilizer use should not be below 50%.

Diversification

Indian Farmers Fertilizer Cooperative Ltd., (IFFCO) a giant in the fertilizer sector and the leading producers of fertilizers in India, has taken a major initiative to branch out in the field of insurance. It has in principle taken, decision to enter into a joint venture with ‘Tokio Marine’ of Japan. IFFCO will retain major shareholding in the proposed joint venture and the Japanese collaborator will be offered 26% stake in the equity. It is expected that an agreement to this effect between IFFCO and Tokio Marine will be arrived at shortly. The scope of the insurance project includes rural, crop, fire, marine insurance business. It is proposed to give a special package for fertilizers industry covering industrial risk policies and urea distribution risk. The Ministry gave all support to IFFCO in going ahead with this venture.

Policy for capital additions regarding sick units under BIFR.

Another new policy decision has been taken to facilitate early and quick recognition of capital additions applicable to the sick and BIFR units. As per the existing policy, only the capital expenditure incurred by units upto the costed year (i.e. a year proceeding the last year before the commencement of the new pricing policy) is considered. This policy holds up refund of expenditure already incurred by the sick units on capital additions and leads to delay in reimbursement of the money spent on capital additions which is very difficult for the sick units. Considering the fact that sick and BIFR units are already facing serious liquidity problems and cannot execute the modernisation/revamping scheme without circulation of limited funds, a policy decision has been taken which will improve the cash flows. It is now proposed to recognise in case of sick and BIFR units past capital additions (net of delitions) made under modernisation/revamping schemes without circulation of limited funds , a policy decision has been taken which will improve the cash flows. It is now propose to recognise on an early basis past capital additions (net of delitions) made under modernisation/revamp schemes from 1990-91 onwards in case of sick and BIFR Units. Even the future capital additions by sick and BIFR units from 1.4.99 onwards till completion of the revamping project may also be considered on yearly basis subject to prior approval and detailed examination of the project and regular monitoring of FICC.

FICC

The Minister of Chemicals and Fertilizers took a review of the functioning of the FICC and the following decisions were taken.

	A vision statement to be prepared for FICC.
	Introduction of Cost Audit System in FICC.
	Preparation of a computerised transportation model on the transportation of fertilizers by the Movement Division.