A Group of Ministers (GoM) on Thursday recommended an increase of Rs. 350 per tonne in fixed cost paid to urea, a move that will put an additional burden of Rs. 900 crore in shape of subsidy outgo on the government.

However, the government ruled out any hike in price of fertilizer provided to the farmers as it has decided to subsidise the hike. The Fertiliser Ministry had moved the proposal for modified New Pricing Scheme (NPS) III, according to which department calculates production cost of urea to pay subsidy. It had proposed to raise the fixed cost of urea by Rs. 350 per tonne. “The GoM has agreed to raise the fixed cost of urea by Rs. 350 per tonne and it would lead to increase in subsidy by Rs. 900 crore,” Fertiliser and Chemicals Minister Srikant Jena told reporters in New Delhi after the meeting.

Mr. Jena said the recommendations of the GoM would not be put up for consideration of the Cabinet Committee on Economic Affairs (CCEA). “The new scheme would remain applicable for one year from the date of notification,” he said.

As per the proposal, the fixed cost of urea produced by plants which are 30 years old or more would be increased by Rs. 150 per tonne, while for all other plants it would be raised by Rs. 350 per tonne. The minimum fixed cost would be Rs. 2,300 per tonne though this would not have any impact on urea prices. The base year for calculating fixed cost of urea has been changed from 2002-03 to 2008-09. However, the industry has been demanding revising it upward by Rs. 700 per tonne by using 2011-12 as the base year. For a urea plant, fixed cost mainly includes salary and wages, contract labour, repair, maintenance and selling expenses.

In 2007, the government approved NPS-III for urea units in the country. The scheme was originally effective from October 2006 to March 2010 and now has been extended for three more years.

During the first meeting of GoM in June this year, fertiliser companies had made a presentation before the panel and demanded a hike in subsidy by Rs. 700 per tonne on the grounds of increase in their fixed costs. To ensure availability of urea to farmers at an affordable price, the government has subsidised it by fixing the maximum retail (MRP) price at Rs. 5,360 per tonne, which is lower than the production cost. It reimburses the difference between production cost and MRP to urea firms in the form of subsidy.

The Government has provided Rs. 70,585 crore as fertiliser subsidy in this year's budget. India produces about 22 million tonnes (MT) of urea and imports 8 MT to meet the shortfall.