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India Urea Subsidy Policies

Fertiliser is a vital input needed for the enhancement of agricultural production and it played a phenomenal role in the achievement of the green revolution in the country. It has all along been the endeavour of the government to ensure the availability of an adequate quantity of fertiliser at reasonable prices to the farmers across the country, since beginning, the Government of India has been regulating the sale, price, and quality of fertilizers and declared fertilizers as an essential commodity and notified the Fertilizer Control Order (FCO) under the Essential Commodities Act, 1957, to regulate sale, price, and the quality of fertilisers.

Main focus of the fertilizer policy is on macro nutrients (NPK). No subsidy was paid on Fertilizers till 1977 except Potash for which subsidy was paid only for a year in 1977. In India, Pricing of urea has been critical to the growth of fertilizer industry in India as well as the subsidy outflow and fiscal health.

Urea Policies in India

The policies related with subsidy payment to urea manufacturing units were implemented in India since 1977:

  1. Retention Price Scheme (RPS) for the period from 01.11.1977 to 31.03.2003
  2. New Pricing Scheme (NPS) – I for the period from 01.04.2003 to 31.03.2004
  3. New Pricing Scheme (NPS) – II for the period from 01.04.2004 to 31.09.2006
  4. New Pricing Scheme (NPS) – III for the period from 01.10.2006 to 01.04.2014
  5. Modified New Pricing Scheme (NPS) – III for the period from 02.04.2014 to 31.05.2015
  6. New Urea Policy (NUP) – 2015 for the period 01.06.2015 to 31.03.2019 (Applicable for 25 gas based urea units)
  7. Amended New Urea Policy NUP – 2015 notified on 28th March, 2018
  8. New Investment Policy – 2012 notified on 2nd January, 2013
  9. Amended New Investment Policy – 2012 notified on 7th October, 2014

Retention Pricing Scheme (RPS)

RPS was the beginning of the “Product-based subsidy” regime in India. GoI introduced Retention Price Scheme (RPS) based on unit-wise cost plus approach from 1st Nov., 1977 to till March, 2003. Initially, RPS was introduced for nitrogenous fertilizers in 1977. Later, it was extended to phosphatic and potassic fertilizers (Including Imported fertilizers). In this, the difference between retention price (cost of production as assessed by the government plus 12% post-tax return on net worth) and the statutorily notified retail sale price was paid as a subsidy to each manufacturing unit. Under the RPS, Retention Price was fixed for each & every urea manufacturing unit by the Department of Fertilisers, Ministry of Chemicals & Fertilisers, Government of India.

Retention Price (Rs/ MT) = (CRC + Conversion Cost) +Variable Cost +Selling Expenses

Subsidy was paid on the basis of Retention Price – MRP.

Under Retention Price Scheme (RPS), the urea manufacturing units were entitled to the subsidy on the quantity leaving the factory gate.

Retention Price Scheme (RPS) was silent on buyback arrangement.

The cost of production, and subsequently subsidy outgo by government, continued to rise since there was no incentive/penalty mechanism for monitoring the production efficiency of players in terms of use of feedstock and other conversion processes.

The Retention Pricing Scheme was replaced by New Pricing Scheme (NPS) w. e. f. 1st April, 2003.

New Pricing Scheme (NPS)

New Pricing Scheme (NPS) replaced the RPS in April 2003. NPS aimed at improving production efficiency in terms of feedstock usage, promoting greater transparency and efficiency in disbursing subsidy payments to urea manufacturing units, while encouraging them to reduce the costs on their own and be competitive.

The Group Concession Scheme under New Pricing Scheme implemented w. e. f. April, 2003, all manufacturing units were characterized into six group based on vintage and the feed-stock. For each group, weighted average group price was worked out barring the outlier (RPS more than +/ – 20% of group average).

Every manufacturing unit will get the concession rate dependent on the group average or the retention price, whichever is lower. Outlier manufacturing units to get benefit of 50 percent of the difference between the RPS and the group average for a time of three years.

NPS I & II

Introducing energy consumption norms for determination of concession rates and decontrolling of movement, distribution and sale of urea,

NPS III

Encouraged urea production from the indigenous urea units beyond 100% of their reassessed capacities (RAC) and use of natural gas as feedstock for production.

Modified NPS III

NPS III was further modified to address under-recoveries faced by existing urea units by grant of additional fixed cost of Rs 350/- per MT or actual increase in fixed cost during 2012-13 compared with 2002-03, whichever is lower.

Component Wise Subsidy Norms

All the variable and fixed expenses are reimbursed on a normative basis.

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All above urea subsidy scheme were formulated to encourage urea production in most efficient manner with cost effectiveness. These urea subsidy schemes (RPS & NPS) were implemented and all existing 28 old urea manufacturing units were entitled to claim the subsidy as per the scheme prevailing at that time.

An applicable RoE is not defined under the modified NPS III and NUP 2015, in general RoE is considered @ 18% (pre-tax) or 12% (post-tax).

New Urea Policy (NUP), 2015

The New Urea Policy-2015 (NUP-2015) replaced NPS for existing urea plants and notified by Department of Fertilizers on 25th May, 2015, and made effective from 1st June, 2015 upto 31st March, 2019.

NUP 2015 focussed on more stringent efficiency norms. The objective of policy was to maximize indigenous urea production, promoting energy efficiency in urea production and reduction in cost of production and rationalizing subsidy burden on the government of India.

NUP – 2015, allowed 25 gas based urea manufacturing units to get the concession rate on the basis of revised energy norms fixed for each group from 1st June, 2015 to 31st March, 2018 which is the simple average of pre-set energy norms of NPS-III and average actual energy consumption achieved during three years (from 2011-12 to 2013-14) or the pre-set set energy norms of NPS-III, whichever is lower.

Existing 25 gas based urea units set up before implementation of NIP 12, are in operation and covered under above subsidy scheme i.e. COST PLUS principle of subsidy with three groups of energy norms and the urea manufacturing units were given target energy consumption norms to be achieved in the year 2018-19, to all three groups.

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In addition to the change in energy consumption norms, the formula for reimbursement beyond RAC was also changed to strike a balance between production beyond RAC and subsidy outgo subject to natural gas availability.

The compensation for other variable cost e.g. the cost of bag, water charges & electricity charges and fixed cost are determined in accordance with existing provisions of NPS-III (notified on 8th March, 2007 ) and Modified NPS-III (2nd April, 2014).

25 gas based urea manufacturing units are eligible to get total cost of production of urea, which includes fixed cost and variable cost, on the production upto 100% re-assessed capacity (RAC).

Production beyond RAC, these units are eligible for their respective variable cost and a uniform per MT incentive equal to the lowest of the per MT fixed costs of all the indigenous urea manufacturing units subject to IPP plus weighted average of other incidental charges which the government incurs on the imported urea.

GoI further amended vide notification dated 7th April, 2017, for production beyond RAC during 2016-17. As per this notification, units were eligible beyond their respective variable cost and a uniform per MT incentive equal to the lowest of the per MT fixed cost of all indigenous urea units subject to sum of IPP, other incidental charges which the Government incurs on the import of urea and weighted average of Central Government levies of urea paid by the urea manufacturing units. In event of any fluctuation in IPP that would have adverse impact on the production beyond RAC by urea units, DOF is authorized to take appropriate decision in consultation with Department of Expenditure.

MFL-Manali, MCFL-Mangalore, SPIC-Tuticorn, BVFCL-Namrup-II and BVFCL-Namrup-III are not covered under this scheme as these units are not connected to gas pipeline network.

However the units were entitled to subsidy on production of urea, dispatches of urea and later receipt of urea at 1st point of sales, implying that entitlement to subsidy was not conditional to the sales. However in the year 2018 (March), at the time of implementation of DBT, the entitlement of subsidy changed to quantity of urea purchased by farmers.

Gas Price Pooling Policy 2015

In the year 2015, pooled gas price mechanism was introduced. Gas Pooling Price Policy was aimed to make gas cost and therefore production cost uniform for all the plants irrespective of their distance from sources; to bring down the working capital requirement of fertilizer plants dependent on imported LNG.

Gas price pooling policy has been introduced by the government whereby gas (feedstock) shall be made available, to existing as well as new urea plants, on pool prices of domestic natural gas resources and expensive imported LNG.

GAIL has been appointed aggregator to administered mechanism. The gas pooled price provides for adjustment in gas price for individual units. Concession rate w.e.f. 1st July, 2015 is still continued and any variation due to change in pooled gas price & others time to time, will be adjusted later on.

Promoting New Investment in India

Considering future demand supply of urea, Government of India had introduced various new features to the urea pricing policies to increase production of urea with increased efficiency, the government has also been active in undertaking initiatives to attract new investments in the sector for dual purpose of reducing import dependency and improving indigenous production.

New Investment Policy, 2012

Government of India has notified New Investment Policy – 2012 on 2nd January, 2013, to attract new investment on gas based urea manufacturing plant. The policy shall be applicable to urea units to be based on gas i.e. natural gas (domestic/RLNG) and CBM.

The Subsidy criteria varies according to the type of project.

Revamp Projects:

Any improvement or incremental increase in capacity of existing plant by way of capital investment in existing train of ammonia urea production.

Expansion or brownfield projects:

Setting up of a new ammonia-urea plant in premises of the existing fertilizer plant utilizing some of the common utilities. Min. investment of Rs. 3000 Crores.

Greenfield Projects

Setting up of a new urea unit at a fresh site where no previous similar manufacturing facilities exist.

Revival of closed units:

Revival of 3 closed units of HFCL at Barauni, Durgapur and Haldia and five closed units of FCIL at Sindri, Talcher, Ramagundam, Gorakhpur and Korba.

The policy regarding the reimbursed price linkage to individual player over-ridden by the Gas Pooling Price 2015 which was introduced in congruence with New Urea Policy in 2015 to ensure availability of feedstock at uniform price across all existing plants.

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Subsidy Reimbursement Mechanism

Under the NIP 2012, the floor and ceiling for the amount payable to urea units has been calculated based on the gas price (inclusive of charges & taxes).

Floor and ceiling price is calculated at delivered price of gas from US $6.5 to US $ 14/mmbtu.

The floor price has been determined to ensure a minimum post tax Return on Equity (RoE) of 12% and the ceiling price maximum at a RoE of 20%.

Floor and ceiling shall increase / decrease in tandem with increase / decrease in delivered gas price for Greenfield/Revival and Brownfield Projects and will be calculated at the end of each quarter, on the basis of average gas price of previous three months. Accordingly, IPP shall also be calculated for each quarter for each plant. The price of the delivered gas will be calculated based on delivered gas price as certified by MoPNG/Central PSU/State PSU.

Every USD 0.1/mmbtu increase in delivered gas price will increase the floor and ceiling by USD 2/MT upto delivered gas price of USD 14/mmbtu.

Beyond delivered gas price of USD 14/mmbtu, only floor will be increased.

In case of revamp projects, floor and ceiling have been linked to delivered gas price of USD 7.5/mmbtu and floor and ceiling shall increase by USD 2.2/MT for every increase in delivered gas price of 0.1/mmbtu.

It encourages investment by Indian industry in Joint Venture abroad in resource rich countries

For units in North Eastern states, the special dispensation regarding gas price that is being extended by GOI/State governments will be available to any new investment. Suitable adjustments will be made to applicable floor and ceiling price in case the delivered price (after allowing for special dispensation) falls below USD 6.5 per mmbtu, subject to approval of Ministry of Finance.

Amended New Investment Policy 2012

New Investment Policy 2012 was amended in October 2014.

As per this amendment, only those new urea projects whose production commences within 5 years from October 2014 are covered under this policy and subsidy will be given only upon domestic sales for 8 years from date of commencement of production. Subsequently such units shall be governed by urea policy prevalent at that time.

All new project proponents are required to furnish a bank guarantee of Rs 300 crores after securing the financial closure but well before the finalizing the Lump Sum Turnkey (LSTK)/ Erection, procurement and commissioning (EPC) contractor.