Technological Advancements Will Pave the Way for Growth

R Mukundan,
Managing Director, Tata Chemicals
A favorable regulatory environment that propels technological advancements is what we need to reinvigorate the fertiliser sector, believes R Mukundan, Managing Director, Tata Chemicals. Mukundan further shares views on how the new government should ensure the overall development of the fertilise sector in the country. He also questions the need for the New Investment Policy.

Please share some insights into the future-scenario if the government decides to double the gas price?
Any gas price hike by the government must be supported by increased domestic production to ensure overall gains to Indian economy, hence the government should link price hike to increased production by domestic producer and they must be held accountable to meet with the committed production levels to address the growing demand and curb India’s import dependence.

While the expected hike in gas price may lead to an increase in the subsidy burden for the government, it can look to offset the additional burden through higher royalty, profit sharing and tax collections from upstream operations expected in development of new gas resources. It will also benefit the overall economy by reducing expensive LNG imports. Further, the recent announcement by the government to promote a comprehensive National Energy Policy that focuses on development of energy related infrastructure, human resource and technology is a welcome move which would benefit a number of sectors, including the fertiliser sector.

How is the ‘gas price in US dollar’ affecting the industry? In your view, what should be an ideal mechanism to calculate and fix the gas prices?
The domestic gas price in USD was introduced five years ago; since then the rupee has depreciated by nearly 25 per cent. Due to the currency exposure, prices expressed in rupees have seen an increase, which in turn have led to higher working capital cost. The Fertilisers Association of India’s submission on the ideal mechanism to calculate and fix the gas prices is quite valid as high gas prices and further increase in fertiliser imports will push up international prices and will lead to increased outgo of foreign exchange. Therefore, there is merit in the domestic gas price to be billed in Indian rupees, not USD.

Besides the glaring disparity in the price of feedstock, how are the issues ie, release of timely payment of subsidies, in-balanced usage of urea, low budgetary allocation to the industry affecting the Indian fertiliser sector?
The country’s twin deficits, fiscal and current account, have reached levels that have prompted a wave of prudence by the previous government. Against a requirement of ` 1 trillion, the government allocated ` 67,970 crore for the current fiscal. With arrears reaching as much as ` 32,000 crore, the budgeted subsidy amounts are getting exhausted fast. As a result, firms are making up for delayed payments through borrowings, which are driving up interest costs. The problem of under-budgeting, especially when the urea subsidy bill is likely to bloat in the next fiscal, will need to be addressed. The huge price gap (50% to more than 100%) with complex fertilisers is leading to disproportionate usage of urea which requires the government to slowly rationalise urea pricing. Moreover, the low recover where in only one-third of the price is recovered from farmers are distorting the market and firms are reluctant to invest in new technologies. Policy regime for fertiliser business is likely to improve in 2014 with implementation of Nutrient Based Scheme (NBS) for urea and timely payment of subsidy bills by the new government.

As a fertiliser company, how do you maintain the profit margins and operating cost through balancing the subsidies offered to the fertiliser sector for gas and those to the farmers?
As a fertiliser company, we have already stretched our efficiency to the best possible level. Delay in payment of subsidy is impacting our operations as well as profitability adversely. Inaction in the sector has weighed on our finances and share prices in the past three years. All these issues need government’s attention. In fact in Q4 of FY14 even Tata Chemicals made losses in fertiliser business for the first time.

May we have your comments on corrective actions and new measures that need to be taken immediately to attract investment in this sector by the industry as well as the policy makers?
The natural gas prices should encourage investment in the upstream segment and boost domestic production of natural gas. However, the new government should look at putting in place a robust framework that enhances the accountability of domestic gas producers. In addition, the government should also look at enhancing the production efficiency by supporting the right technology and giving out incentives for efficient domestic production. New avenues such as coal gasification should also be considered as future source of fuel. The new government can adopt a few corrective actions such as deregulating the price of urea or inclusion of urea under ‘NBS’ scheme, reviving sick and closed fertiliser units to boost capacity, and encouraging industry players financially to set up overseas facilities thus attaining self-sufficiency in urea production.

What is your take on the planned move of Department of Fertilisers for creation of Sovereign Wealth Fund (SWF) acquiring fertiliser assets abroad? To what extent this action would bolster the growth of fertiliser industry?
Indian fertiliser companies rely entirely on imported potash and phosphate. Urea is the only fertiliser where the country can partly rely on domestic production, although availability of natural gas remains a major issue. In order to create long-term resource security for the country in the fertiliser sector, we believe that the new government should push for acquisitions abroad and the creation of a SWF for acquiring fertiliser assets abroad, on the lines of the China model. The government is already looking into setting up common overseas acquisition arms, and the need of the hour is to source resources like potassium, rock phosphate and urea from abroad. Access to raw materials and appropriate technology transfer would help in making the industry more sustainable.

Technology stagnation has been cited as one of the constraints for the growth of Indian fertiliser sector. May we have your views on how this issue can be tackled in Indian context?
Internationally, the fertiliser producing technology has progressed many folds with advancements focused at making plants more efficient. In India, deficit in technological advancements in the fertiliser sector is one of the biggest constraints for the growth. Over-regulation and price control has resulted in the country not witnessing any significant investment. Due to a lack of clarity on returns and input cost pricing, no new urea plant has come up in recent years. In order to revive the industry, the new government would need to make the sector attractive for investors and create a conducive regulatory environment that propels technological advancements. This can only be done by removing price control and incentivising efficient producers.

Your views on recent policy changes proposed for the fertiliser sector (Urea & Nutrient based) While a lot has been mentioned and talked about New Investment Policy for urea, I believe this is not the most important move government should focus on. In fact, we probably don’t need New Investment Policy.

The recommendation for the government would be to remove the 35 per cent cap on neem coated urea and make neem coated urea mandatory; extend NBS to urea; adopt a calibrated price increase of urea by at least 20 per cent every year for next 4 years; ensure prompt subsidy payments; focus on government to government contracts for investments in urea and other fertilisers assets overseas using SWF; focus on improving farm productivity by rejuvenating agriculture extension services and ensure priority allocation of domestic gas to domestic urea.

As an immediate step, the new government can look at handing over the sick units to the public sector on nomination or make it open for the private sector. It can also be done through public private partnerships and joint ventures. Private sector participation will bring in much needed competition and improve efficiency. Further, the government should look at granting state owned companies more autonomy and focus on increasing efficiency as showcased by the Gujarat government. Over the last 10 years several state-owned companies such as Gujarat State Fertilizer and Gujarat State Petroleum Corporations have turned around due to such initiatives.

There is a need to diversify the feedstock used by the industry rather than it being over-reliant on natural gas. With recent advances in coal gasification technologies, the competitiveness of coal-based fertiliser projects has improved substantially. A number of public-sector companies in India are coming together to revive fertiliser plants, which are also public-sector undertakings.