The long-awaited move to bring urea under the Nutrient-Based Subsidy (NBS) scheme is likely to be announced in the coming Union Budget, to be unveiled on February 28, even as the government would decontrol its prices gradually.
The Committee of Secretaries (CoS) under Planning Commission member Saumitra Chaudhuri is currently working out a viable model to determine how the subsidy component would be fixed, as urea production is based on different forms of feedstock such as gas, naphtha, fuel oil and coal.
"Urea decontrol would happen in 2011-12 from April 1. The CoS is working on various models to see how the subsidy can be harmonised, as urea is dependent on various feedstock. Urea cannot be treated uniformly," a senior official in the Department of Fertilisers (DoF) said.
Apparently, DoF has suggested a couple of models to the finance ministry on how to bring urea under the NBS scheme.
It has also sent a letter to the finance ministry saying any further delay in this would have an adverse impact on the domestic industry as well as farmers, besides negating balanced nutrition of the soil.
"If NBS policy on urea is not implemented and an appropriate investment policy is not put in place, the import of fertilisers will further rise as demand is increasing. This will result in higher international prices and higher subsidy outgo. This will also be at the expense of domestic industry, which has been for many decades providing fertilisers at competitive prices compared to imports," DoF said in its letter.
After preparing the draft report, the CoS would forward it to the Group of Ministers (GoM) headed by Finance Minister Pranab Mukherjee.
Earlier this month, the GoM had deferred the decision to decontrol urea prices in the wake of soaring food inflation.
The government is looking at options on how urea can be covered under NBS. It is looking at a uniform subsidy component on the basis of a market-driven price for the gas-based industry.
The industry has also suggested the government explore pooling for different types of feedstock.
Initially, while freeing prices, the government is likely to maintain a benchmark for the industry, beyond which the urea prices cannot be raised.
"We are ready to give an undertaking to the government that urea prices will not be increased beyond a percentage. However, the government has to also recognise the cost of production," said Satish Chander of the Fertiliser Association of India.
De-canalisation of urea imports would also take place once urea comes under the NBS regime.
The government was also working at raising the urea prices by 2-5 per cent in 2011-2012, officials said. At present, only authorised agencies can import urea.
Urea represents almost 50 per cent of all fertiliser products consumed in the country with an annual consumption of 27 million tonnes (mt), of a total fertiliser consumption of 55 mt.
Hence, the industry has been persistent on its demand to cover urea under NBS, in the absence of which the full benefit of the reforms cannot be achieved.
Besides freeing prices, the industry is also eagerly waiting to see how the investment policy for urea is upgraded by the government.
At present, some companies are holding back large-scale expansion due to absence of proper incentives.
The government had raised the prices of urea by 10 per cent on February 18 last year from Rs 4,830 to Rs 5,310 a tonne, which was effective from April 1.
The revenue foregone towards fertilisers subsidy payout in 2009-10 was Rs 8,010 crore (Rs 80.1 billion), which was 3.22 per cent of the total revenue forgone, compared to 6.3 per cent in 2008-09 which amounted to Rs 14,200 crore (Rs 142 billion).