THE impact of the gas infrastructure development cess — which would increase the price of a 50kg bag of urea by around Rs200, according to industry estimates — may cause a paradigm shift in the manufacturing and pricing of the fertiliser.

One wonders if the government has studied the impact of the cess on farming, industry and, more importantly, on national food security.

Once the industry passes on the impact of the GIDC onto the consumers, the difference between local and international urea prices would virtually cease to exist. And the fear is that once that differential is removed, pressure on the government would grow from international lenders and local vested interests to deregulate urea prices.

The government, with its bias in favour of the free market, would find it hard to resist this because it would not create any additional financial burden on the farmers.

For the last few years, urea prices in the country have hovered around Rs1,800 per bag, except during seasonal variations. International prices, currently at a reduced level, have been around Rs2,100 bag.

While the GIDC should have a varying impact — depending on the age of the manufacturing plant etc — on the price of different units, even plants that suffer the minimum impact would equalise their prices with those absorbing the biggest hit.

The industry has calculated that the impact of the cess would vary from Rs70 per bag to Rs200 per bag. The price would thus increase by Rs200 per bag, taking the total price to Rs2,000 under normal circumstances. Seasonal variations could add another Rs100-150 per bag, and cartelisation could add anything to it at any point of time.

And this price of Rs2,000 would be for buyers who pay cash. For those seeking the fertiliser on credit, the price would be anywhere between Rs2,200 to Rs2,400 — almost Rs100-200 over the international price.

Apart from farmers, the industry would have problems of its own with the price differential removed. With feed gas becoming scarce by the day, the pressure on the policymakers to ensure gas for these plants would also be taken off; they would know that imports can fill the gap between demand and supply.

Thus, gas supply to the industry would probably become more erratic, and given the porous borders and systems, no one would know who is importing what volume of the fertiliser.

One of the oldest investors in urea manufacturing is already in the process of setting up a plant in Africa. Others may follow soon if the government does not protect the industry, says an industry source.

Since the GIDC has already become a law, the government now needs to see how its impact on urea pricing and industry could be minimised. The coming budget provides it with an opportunity to clarify its long-term policy position on the manufacturing, trade and consumption of urea.

One suggestion for the government is to calculate the impact of the GIDC on each plant, and let that factory’s prices reflect only that impact. For marketing, some analysts suggest the government can fix a uniform price at the national level, which would fall somewhere in the middle of the minimum and the highest impact.

By the same calculation, the government can tax those plants which make additional money and subsidise those that lose money because of the officially declared price. This is one way of keeping the impact of the GIDC to its minimum.

An additional measure could be some kind of a subsidy regime that is implemented in letter and spirit. The Indian model presents one option, where the government is now planning to transfer cash subsidies directly to farmers and not through the industry, which hardly benefits growers.

The federal government has announced different subsidy packages at different times in the last two years, but hardly any one of them has materialised. The farming community has consistently been losing money on almost every crop; the more they produce, the more they suffer because of crashing output prices.

It is time to link input prices with output prices. And the budget provides the government an opportunity to commit resources to such options.

Published in Dawn, Economic & Business, June 1st, 2015

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