Review of Fertilizer Pricing Policy in India

CASIRJ Volume 5 Issue 2 [Year - 2014] ISSN 2319 – 9202

International Research Journal of Commerce Arts and Science http:www.casirj.com Page 436

Review of Fertilizer Pricing Policy in India1

Harjeet Singh

Ph.D research scholar in CESP

JNU, New Delhi

Fertilizer is a chemically produced substance used to provide the essential nutrients for the crop.

Fertilizers are of two types straight and complex. Straight Fertilizers consists of only N or P or

K whereas Complex Fertilizers/Compound Fertilizers consist of the combination of NP, NPK,

and NPKS etc. Fertilizers are labelled according to the percentage of nutrient contained in the

product. The first number denotes the percentage of N in the product, second number denotes the

percentage of P in the product, third number denotes the percentage of K and fourth number

denotes the percentage of Sulphur. Fertilizers have played a crucial role in stimulating the

growth of agricultural produce at the time of green revolution and even now. Even after the

execution of three five year plans India was short of agricultural production. It is only after the

invention of HYV, agricultural production increased in the country in the green revolution

period. Green revolution period saw the extensive use of fertilizers application. Fertilizers are

one of the main drivers of agricultural growth. Given the limited agriculture land and technology

the only way of increasing productivity of land is application of fertilizers. Timely availability of

fertilizer is a must in all agricultural season. Demand for fertilizer is seasonal while it is

1 The author is a Ph.D research scholar in CESP, JNU, New Delhi and can be contacted at

[email protected]



produced all over the year. National agricultural policy 2001 emphasizes the role of fertilizers in

achieving the target of 4% agricultural growth. Favourable agricultural production vis a vis

demand for agricultural products keeps their prices low and help in check the inflation. So it

serves the two purposes, ensuring the food security for India and controlling inflation. Given this

fact, fertilizer has been recognized one of the eight core industries in India and has a weight of

1.25% in overall weight 37.90% of Index of Industrial Production (IIP) for all eight core

industries.

Fertilizer pricing policy is a very politically sensitive issue. The government has to take care of

the people for welfare reasons or political reasons. It is clear from the fact that when the

government tried to control the P and K industry in 1992 then there was a massive protest of this

decision all around the country and demand for fertilizers fell and government had to announce

an adhoc subsidy to protect the interest of farmers. Today there are almost 12 crore farmer

households in India which constitute almost 50% of the population if we assume the average size

of farmers household is five in Indian conditions. So any major decision taken by government

which badly affects the entire country can be dangerous for the ruling government. There are

basically three different entities whose interest is involved in the Fertilizer sector and interest of

one entity is different from each other. One is domestic producers of fertilizers i.e. Fertilizer

Industry, second consumers of fertilizers i.e. Farmers and third is of course the government

which designs fertilizer policies. Interest of each entity is different from each other. There has

been a control regime of the fertilizer sector, the reason being fertilizer is a basic infrastructure or

we can say an essential input for agriculture. It requires special attention by the government as it

is one of crucial factors contributing increase in the productivity of land along with other inputs

used in agriculture.



Fertilizer Policy basically moves around the Urea which is nitrogenous in nature and P and K

fertilizers since, of the total production of all fertilizers products urea alone takes a share of

around 50 %. As far as Urea is concerned it is a controlled fertilizer in terms of price i.e. price of

urea is decided by the government. The price of urea is kept lower than the actual cost of

production and difference is subsidized by government. So far there have been two major

schemes operated for the pricing of urea one is Retention Price Scheme (RPS) operated from

1977 to 2003 and Group Price Scheme (GPS) – a modified version of RPS, which is currently in

position since 2003.

Under RPS retention price is cost of production plus 12% on the net worth of company, at 85%

of the plant capacity. The cost of production of urea which includes both variable cost and fixed

cost differs from plant to plant depending upon the type of feedstock being used for

manufacturing fertilizers, technology, age of plants etc. Since the cost of production plant wise

there were various unit specific retention prices. The price of urea was fixed uniformly by

government. Producer can charge from farmer only maximum retail price (MRP) which was

lower the actual cost of production and difference of RPS and MRP was paid by government to

producer. So subsidy of any plant can be defined as follow

Subsidy i = RPS i –MRP where i refers to ith

plant

The assured 12 % return attracted good investment and capacity generation in the forthcoming

years. But there was a negative point as well. This scheme did not give the producers any

incentive to be cost effective and become competitive cost wise. Actually it promoted

inefficiency. A high cost implies more retention price and hence more subsidy from government

account. Government tried to determine the uniform retention price for urea and in 2003 RPS

was replaced by Group Price Scheme (GPS). Under this all plants were divided into six groups.


International Research Journal of Commerce Arts and Science http:www.casirj.com 39

The criteria of designing the groups were the type of feedstock used by plants and vintage i.e.

age of plants. Thus six groups were made as follow: pre 1992 gas based plants, 1992 gas based

plants, pre 1992 naphtha based plants, post 1992 naphtha based plants, plants based on LSHS

and mixed feedstock based plants. For each group, a group retention price is calculated based on

the RPS of all plants in that specific group and RPS will be minimum of group weighted or

individual RPS. NPS gave an incentive to inefficient plants to be more cost effective which are

under same group and using same technology.

Figure1: Price trends of Urea Rs/tonne

P and K Fertilizers were covered under RPS in 1979. The P and K fertilizers are decanalized

item i.e. they can be imported by the private sector while urea is a canalized item i.e. imported by

the government only. The pattern of pricing was same as urea till 1992 when the government

tried to decontrol the pricing and distribution of P and K fertilizers industry. Decontrolling of the

industry led to sharp increase in the prices of DAP and MOP which are most used fertilizers to

ensure the availability of phosphate and potash for the soil. The government took immediate step

and announced fixed adhoc concession rates or subsidy to lower down the impact of price rise of

0

1000

2000

3000

4000

5000

6000

1980 1985 1990 1995 2000 2005 2010 2015

Price of Urea (Rs./tonne)

NPS RegimeRPS Regime



fertilizers. The concession rates were revised from year to year. So since then there has been a

coexistence of decontrolling and subsidy. There has been an informal consensus. In 2010

government came up with a new proposal of nutrient based subsidy for P and K fertilizers. Under

this scheme, price of various nutrients like N, P, K and S per kg is decided by the government

and the total amount of subsidy for a product is calculated based on the percentage nutrient

contained in the product. Look at the table to understand this. After the nutrient based subsidy

the price of DAP and MOP immediately increased as can be seen from the Figure 2.

Nutrient Subsidy Rs./Kg for 2012-13 w. e. f. 1

April 2012

N 24

P 21.80

K 24

S 1.67

1 tonne= 1000 Kg.

NBS for different NPK fertilizers depending on subsidy rates announced as per previous table

Product N in one tonne of

product (Kg)

P in one tonne of

product (Kg)

Subsidy Rs./tonne of product

DAP (18-46-

0)

18%*1000kg= 180 46%*1000kg=460 24*180 + 21.80*460= 14348

1 tonne = 1000 Kg.

Figure2: Price trends of DAP and MOP Rs/tonne



Every crop requires some special nutrient to be grown which may not be available in the soil in

the right quantity. This includes both macro and micro nutrient. Macronutrient consists of

Nitrogen, Phosphorus, Potash, Sulphur, Calcium etc. whereas the micro nutrients consist of Zinc,

Boron etc. Deficiency of any macro or micro nutrient may hamper the growth of agricultural

production. In India there has been increasing use of macronutrient carrying fertilizers like Urea,

DAP, MOP and SSP etc. and there has been a neglect of use of micronutrient carrying

fertilizers. Therefore the continuous application of only macronutrient based fertilizers will not

increase the growth rate of agricultural production unless there is a simultaneous use of

micronutrient based fertilizers. The production resulting through the application of fertilizers is

called crop response ratio. The crop response ratio has been quite stagnant in India for a long

period because of neglect of micronutrient. There is always a optimum ratio of application

between N, P and K. However it varies from place to place depending upon the soil and the crop

to be grown. For India as a whole it is considered to be 4:2:1.

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1980 1985 1990 1995 2000 2005 2010 2015

Price of DAP Price of MOP

RPS Regime Decontrolled Regime NBS Regime



The skewed application of fertilizers in favour of nitrogen is because of the relatively cheaper

price of Urea which is primarily a nitrogenous fertilizer and has a maximum share in the sale of

nitrogenous product. There have been two parallel price policies of fertilizers with respect to

Urea and P and K fertilizers. Price of Urea has always been controlled in the country. It is sold

at the government decided price which is below the cost of production and the difference

between price and cost is paid by government to manufacturers. At present Urea is a canalized

item .i.e. it is imported by the government only. India is not self sufficient in the production of

Urea. Some the demand is met though import and even the indigenous urea requires the imported

feed stock like natural gas. There are various plants in the country which are run on the naphtha

and fuel oil but the government is giving these plants incentives to switch their technology to

natural gas based technology. As of today, natural gas is best suited as a feedstock for urea

industry because it is relatively cheaper than other feedstock like naphtha, fuel oil etc. Moreover

it is quite efficient and least pollution creating. The cost of natural gas comprises around 60-70%

of the cost of urea. Given the limited supply of natural gas, fate of urea industry will depend

upon the availability of the natural gas at relatively affordable prices. If the price of natural gas

shoots up too high in the international market, the domestic Indian urea plants will become

unviable. Understanding the resource constraints Indian government is looking to set up the joint

ventures in those countries there is relatively abundance of natural gas and the price of gas is

relatively low. This step will help in ensuring the availability of urea at relatively lower price in

the country. Currently India has some joint ventures abroad in Senegal, Jordan, Morocco, Oman,

Tunisia, Republic of Gabon etc.

On the other hand we have P and K fertilizers whose price remained controlled till 1992 when

they were under Retention price scheme. In 1992 the government decided to decontrol the price



of P and K fertilizers, this decision caused significant increase in the price of P and K fertilizers

like DAP , MOP, SSP etc. The rise in prices of P and k fertilizers caused a fall in their demand

and farmers were quite affected following the price rise. Government then decided to give a

fixed adhoc concession to farmers to lower down the P and K fertilizer prices. There was a

general informal consensus between government and manufacturers of P and K fertilizers that a

fixed amount of subsidy would be given to manufactures and the manufacturers will charge

farmers a price net of that adhoc subsidy. The amount of subsidy was revived from time to time.

In 2010 instead of a product subsidy the government came up with a new proposal of nutrient

based subsidy for P and K fertilizers. Government decided the price of each nutrient per kg and

then accordingly the subsidy for the product can be calculated depending upon the content of

nutrient in the product. The idea of nutrient based subsidy was introduced to create a balanced

use of N, P and K. But the Urea which has the largest share in the nitrogen providing fertilizer

products, is still out of the coverage of Nutrient based subsidy. Currently the pricing of urea is

done under new pricing scheme (NPS) which is based on weighted group retention method.

Therefore at a time when we have urea which is relatively cheaper than P and K fertilizers, the

relatively higher use of urea will continue unless the urea is brought under the purview of

nutrient based subsidy.

Now there arise various questions like whether should the Urea be covered under nutrient based

scheme. If so, how is this going to affect the demand for urea and agricultural production in the

country especially at a time when government has made its commitment to ensure food

availability for everyone under right to food act? Should there be any subsidy regime for

fertilizers or total deregulation of pricing of all fertilizers? And what if the entire fertilizer sector

is decontrolled? International market prices are dependent upon the demand and supply



conditions not on the cost based conditions. Given the increasing demand of fertilizers in the

world, international market prices will be quite high as compared to actual cost of production to

represent their scarcity value. Consider the two situations as follow

Case 1: When there is price control and subsidy regime.

Under this case subsidy can be given to either producer or farmers. And subsidy should be

targeted to small and marginal farmers only instead of targeting all classes of farmers. This move

will reduce the subsidy burden of government to some comfort level. This is what is happening

under nutrient based subsidy. Initially the subsidy is being given to producers in the first phase

and in the second phase it will be directly transferred to the bank accounts of farmers having

adhar card based on their land holding pattern and requirement of fertilizers depending on the

type of crop to be grown and soil. . Large or rich farmers do not require any subsidy as they can

still manage to buy fertilizers even at relatively higher prices, the beneficiary should be poor and

small farmers which are severely hurted under price. There is one more argument for eliminating

subsidy on large farmers as they can afford to increase the productivity of land by using modern

technology of agriculture like increasing mechanization while small and poor farmers cannot

afford the modern technology and have to be depended on the fertilizers only to increase the

productivity of their land. When the cost of domestic production is less than cost of imported

fertilizers with the domestic capacity constraint then some of the requirement of fertilizers will

have to be imported and imported fertilizers are also sold at MRP set up by government. So the

total subsidy has two parts i.e. subsidy paid on domestic fertilizers and subsidy paid on imported

fertilizers. And when the cost of domestic production exceeds the cost of imported fertilizers it is

cheaper to buy fertilizers from international market and hence import is judicious option. The

entire subsidy is on imported fertilizers only.



Option 2: When there is price decontrolling and no subsidy

In this case Government decontrols the fertilizers sector i.e. producers can charge the price

according to the market conditions. No doubt the market driven prices will higher than the

controlled price as there is no government subsidy for producers. Now some farmers will not be

in a position to buy fertilizers or will buy lesser amount of fertilizers due to its price jump.

When the domestic market determined prices exceeds international price of fertilizers

The entire domestic demand should be satisfied by the import of fertilizers. No demand of

domestically manufactured fertilizers. And when the domestic market determined prices is less

than international price of fertilizers. The domestic demand will be satisfied by the domestically

manufactured fertilizers to the level of domestic capacity and residual demand will be met by

import at the international prices. In any case interests of all three agents viz. government,

producers and farmers can’t be ensured simultaneously. Decontrolling of fertilizer pricing

without subsidy support adversely will affect the farmers demand for fertilizer and hamper the

agriculture production and cause inflationary trends in the economy. Government will not have

direct burden of subsidy payment and fertilizer industry though may charge a relatively higher

price but it may experience the fall in their sales volume of fertilizers and come across with the

stock piling of fertilizers products. But the situation is worse for country as a whole.

References

1. Department of Fertilizer, Ministry of Chemicals and Fertilizer (2013) “ Annual Report

2013”, Govt. of India, New Delhi

2. Department of Fertilizer, Ministry of Chemicals and Fertilizer “Various Annual Report

between 2004-12 ”, Govt. of India, New Delhi

3. Department of Fertilizer, Ministry of Chemicals and Fertilizer (2012) “Indian Fertilizer

Scenario 2012”, Govt. of India, New Delhi



4. Government of India (2007), “Report of the Working Group on Fertilizers for Eleventh

Five Year Plan (2007-12), Planning Commission, Govt. of India, New Delhi

5. Government of India (2012) , “Report of the Working Group on Fertilizers for Twelfth

Five Year Plan (2012-17), Planning Commission, Govt. of India, New Delhi

Review of Fertilizer Pricing Policy in India

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