Implementation of nutrient-based subsidy and direct payment of subsidy to the farmers might be taken care of in the Budget.
The fertilizer industry remains the backbone for the country's agriculture growth by providing the primary as well as the secondary nutrient requirement. The industry in the past had acquired a controlled nature due to strict production and pricing control by the government of India.
As a result incremental investment into the sector was discouraged and the industry did not witness any new capacity addition in the past decade. On the other hand the demand for fertilizers has increased multifold and the government had to resort to costly import in order to bridge the demand-supply gap.
The result has been increased fertilizer subsidy outgo from the government's coffer; subsequently delay in fertilizer subsidy payment and consequent complications in working capital management for the fertilizer industry. Usage of costly naphtha as feedstock due to lower availability of cheaper natural gas also rendered the sector inefficient.
Although the issues pertaining to delay in subsidy payments and gas availability have been addressed to an extent, the measure to induce fresh investment has not borne fruit.
The new investment policy that the government notified in September 2008 has not so far been able to attract new investment in major expansion or new projects.
Besides steps towards implementation of the nutrient based subsidy payment has also not seen the light of the day. The actual bane that's denying fresh investment is the controlled structure of the industry, thus the government needs to address the issue or if not should create an environment for efficient and profitable operation within the existing structure.
The government is contemplating introduction of new system of fertilizer subsidy, which may involve a direct transfer of subsidy to the farmers and also a system which promotes nutrient based subsidy regimes.
The recommendation for partial de-control of fertilizer regime to let rates of non-urea fertilizers be determined by the market would also be implemented.
Budget expectation of the industry
Following are the recommendations of the Associated Chambers of Commerce and Industry of India (ASSOCHAM) for the fertilizer industry:
- In order to encourage new Greenfield investment in the fertilizer sector, the association has recommended complete exemption of project imports for fertilizer sector from customs duty and also desire deemed export status to indigenous supply of capital goods, used in all new investment in fertilizer projects.
- Waiver of excise duty on capital goods, used in fertilizer projects.
- Exemption from sales tax and value added tax (VAT) for capital goods used in fertilizer products.
- Benefit of tax holiday under income tax act for a period of 10 years should be extended to all future fertilizer projects in order to help the sector increase domestic product that will reduce reliance on imports.
- Exemption from other taxes and duties levied on the inputs, finished fertilizers and services utilized in production and distribution of fertilizers in order to keep the price (MRP) of fertilizers low so that the farmers can afford it. This will help in keeping the prices (MRP) within affordable limit of farmers to encourage consumption for accelerating agricultural production and productivity.
- The industry desires withdrawal of excise duty on Fuel Oil/LSHS used for fertilizer manufacture, besides waiver of excise duty on HDPE bags used for packing fertilizers.
- The association also recommended withdrawal of customs duty on LNG, project imports & spares for fertilizer projects, Ammonia, Phosphoric acid, Rock phosphate, Sulphur, Sulphuric acid and Capital goods for implementation of Clean Development Mechanism (CDM) projects for fertilizer sector.
- Concessional rate of service tax on services related to fertilizers and inputs for fertilizers and agriculture which include Storage and Warehousing charges for Fertilizers, Intellectual Property Services which include design, process technology, and construction of commercial & industrial building or civil structure.
Analyst Expectations
In the past few years, there were lot of announcement on the Indian fertilizer sector, but they had hardly any favourable impact on the sector.
The increase in natural gas production, ever since Krishna Godavari D6 basin started production in April 2009 was a major milestone for the Indian fertilizer sector in general and Urea producers in particular.
Though nutrient-based subsidy regime, direct payment of subsidy to farmers will really be beneficial in the long-term interest of the sector, the initiatives towards these announcements are critical.
The artificially low prices of controlled fertilizers and lack of pricing flexibility thereof needs to be addressed. But over 60% of the population is in rural areas, and such decisions are very politically sensitive too.
So, there is a very thin hope that such measures to improve the long term viability of the sector, which will also arrest the ballooning fertilizer subsidies would be implemented by the government in the ensuing Union Budget 2010-11.
Stocks to watch
Tata Chemicals, Rashtriya Chemicals & Fertilizers, Deepak Fertilizers & Petrochemicals, Gujarat Narmada Valley Fertilizers, Coromandel International
Outlook
The Indian fertilizer sector in general and Urea producers in particular have benefited from increased availability of natural gas while the entire sector also benefited from timely payment of fertilizer subsidy in cash.
Implementation of partial de-control of fertilizer regime as recommended by the group of ministers (GOM) to let rates of non-urea fertilizers be determined by the market will help in product innovation and improved efficiency among the phosphatic fertilizer manufacturers.
The actual subsidy burden of the government is set to be relatively lower in FY 2009-10 over the previous year with drastic 48% fall in urea prices, 62% fall in DAP prices and 23% fall in potassium chloride (Muriate of Potash) in April 2009-January 2010 over the corresponding previous year period.
But urea prices have hardened from $233.90 per tonne in October 2009 to $275.75 per tonne in January 2010, while DAP prices have rebounded from $290.25 in November 2009 to $427.50 in January 2010.
If global prices continue to harden, then the relative benefit of lower fertilizer subsidy will no longer be available. So, the government cannot postpone the hike in fertilizer prices for too long.
Rather than patching up the current malaise, it makes sense to take initiatives to overhaul the system and facilitate long-term growth of the industry.
After all, this can make India self-sufficient at least in urea, though it may have to still import rock phosphate / phosphoric acid required to produce di ammonium phosphate, and the entire muriate of potash requirements. But while we expect laudable intentions on fertilizer sector stewed in the Union Budget 2010-11, concrete initiatives have to wait longer.
