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Updated: December 14, 2012 04:39 IST

Cabinet Committee clears new urea investment policy

PTI
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A consignment of urea, imported from Oman, being offloaded. File Photo: M. Moorthy
A consignment of urea, imported from Oman, being offloaded. File Photo: M. Moorthy

Policy aims to incentivise fertilizer cos to set up new plants

The Cabinet Committee on Economic Affairs (CCEA), on Thursday, approved a urea investment policy, which is likely to incentivise fertilizer companies to set up new plants and expand existing capacity.

India imports over 30 per cent of its urea requirement and the policy aims at reducing that. But it is unlikely to have any impact on existing prices.

“The new urea investment policy has been cleared,” sources said after the CCEA meeting here.

The policy, which aims to attract fresh investment of about Rs.35,000 crore to increase domestic production by eight million tonnes, has been cleared as the previous policy failed to attract the much needed funds.

Under the new policy, the government will give 12-20 per cent post-tax return on fresh capital infused by the manufacturers for setting up of new plants as well as for expansion and revamp of the existing ones.

To ensure this return, the government would cover the entire cost of natural gas, which is the main feedstock of urea, and accounts for 80 per cent of the cost. The government controls the urea sector and has fixed the maximum retail price (MRP) at Rs.5,360 a tonne.

The difference between the MRP and the cost of production is given as subsidy to manufacturers.

For determining the cost of production of new plants to be set up after the policy comes into effect, the government has set a floor and ceiling price of urea, based on the price of natural gas plus 12-20 per cent equity returns.

The new investment policy was approved, by the Group of Ministers (GoM) headed by the then Finance Minister Pranab Mukherjee, on February 24.

However, sources said the Ministry made some changes in the draft policy after inter-ministerial consultation. It proposed covering entire cost of natural gas, while the GoM had favoured providing subsidy on gas price within the range of $6.5-14 mmBtu.

The country produces 22 million tonnes of urea, against the requirement of 32 million tonnes.

Meanwhile, the CCEA also cleared a proposal to extend additional subsidy to Fertilisers and Chemicals Travancore (FACT) till June, 2013, to cover the cost of naptha-based complex fertilizer.

However, in the case of Madras Fertiliser (MFL) and Gujarat Narmada Valley Fertilizers and Chemicals, both have been asked to submit a report to the Committee of Secretaries,” sources said.

In the last two years, the government has been giving additional subsidy to naptha-based complex fertilizer makers such as FACT and MFL to cover higher cost of production with a condition that they will convert their units into gas-based.

FACT is expected to complete conversion of its units into gas-based by May next. Hence, the CCEA cleared the additional subsidy till June, the sources said.

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