A Group of Ministers (GoM), headed by Finance Minister Pranab Mukherjee, on Friday approved a new investment policy for the urea sector in a bid to bridge the widening demand-supply gap and reduce dependence on imports of the key soil nutrient.

According to highly placed sources the GoM, at its meeting, considered the report of the Committee of Secretaries (CoS), which had proposed a new investment policy and gave its approval to it.

The policy will now be placed before the Union Cabinet for a formal approval and then subsequent notification.

In 2008, the New Investment Policy announced by UPA-I to boost urea production had failed to attract investments. Seeking to set right the situation, the government in 2010 decided to frame a new policy. In 2011, a Committee of Secretaries (CoS), headed by Planning Commission Member Soumitra Choudhary, was set up for this purpose. The CoS had in its recommendations suggested incentives for setting up of greenfield and brownfield projects as well as expansion of existing plants and facilities. At present, the country faces a shortfall of seven million tonnes, which is met through imports. Domestic urea production is estimated at 22 million tonnes, while the consumption is pegged at 29 million tonnes.

With gas being the main feedstock for urea production and accounting for 80 per cent of the cost of manufacturing, the draft policy has suggested that the government should bear the entire cost of gas till $14 per mBtu. In case of using gas of higher price, the urea price will go up by $20 a tonne for every dollar increase in the fuel cost.

The domestic cost of urea production (floor and ceiling price) is determined based on the cost of imported urea, which is known as the import parity price (IPP). The minimum and the maximum cost of production varies for greenfield and brownfield projects. For greenfield investments, the floor price is fixed at $310 a tonne and the ceiling at $340 a tonne. Similarly, the floor and ceiling prices for brownfield investments are kept at $290 and $320 a tonne, respectively.

However, the gas price in this case will be fully subsidised between $7.5 and $14 per mBtu. Under the present investment policy, implemented in September, 2008, the floor and ceiling prices of urea have been fixed at $250 and $425 a tonne, respectively.