IBS-Mumbai

Economics Project

Demand and Supply Analysis on Fertilisers

By:

ADITYA SUREKA

GUNJAN MALHOTRA

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Sr.No Topic Page.No

1 Introduction to the topic 1

Fertiliser and Manures

2 (consumption, 6-14
Production and Import)

Elasticity of Demand 15
3 and Supply

23
4 Bibliography

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Introduction to the Topic

India is primarily an agriculture based economy. The agricultural sector

and its other associated spheres provide employment to a large section of

the country's population and contribute about 25% to the GDP.

The Indian Fertilizer Industry is one of the allied sectors of the

agricultural sphere. India has emerged as the third largest producer of

nitrogenous fertilizers. The adoption of back to back Five Year plans has

paved the way for self sufficiency in the production of food grains. In fact

production has gone up to an extent that there is scope for the export of

food grains. This surplus has been facilitated by the use of chemical

fertilizers.

The large scale use of chemical fertilizers has been instrumental in

bringing about the green revolution in India. The fertilizer industry in

India began its journey way back in 1906. During this period the first

Single Super Phosphate (SSP) factory was established in Ranipet in

Chennai. It had a capacity of producing 6000 MT annually. In the pre and

post independence era a couple of large scale fertilizer units were

established namely the Fertilizer Corporation of India in Sindri, Bihar and

the Fertilizer & Chemicals Travancore of India Ltd in Cochin, Kerala.

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The Indian government has devised policies conducive to the manufacture

and consumption of fertilizers. Numerous committees have been formed

by the Indian government to formulate and determine fertilizer policies.

The dramatic development of the fertilizer industry and the rise in its

production capacity has largely been attributed to the favourable policies.

This has resulted in large scale investments in all three sectors viz. public,

private and co-operative.

At present there are 57 large scale fertilizer units. These manufacture an

extensive range of phosphatic, nitrogenous and complex fertilizers. 29 of

these 57 units are engaged in the manufacturing of urea, while 13 of

them produce Calcium Ammonium Nitrate and Ammonium Sulphate. The

remaining 20 fertilizer plants manufacture complex fertilizers . There are

also a number of medium and small scale industries in operation, about

72 of them. The following table elucidates the installed capacity of each

sector.

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Sl. No Sector Capacity (LMT) Percentage Share

N P N P
1 Private Sector 53.94 35.13 44.73 62.08
2 Public Sector 34.98 4.33 29.0 7.65
3 Cooperative 31.69 17.13 26.27 30.27
Sector

Total 120.61 56.59 100.0 100.0

The Department of Fertilizers is responsible for the planning, promotion

and development of the Fertilizer industry. It also takes into account the

import and distribution of fertilizers and also the financial aspect. There

are four main divisions of the department. These include Fertilizer

Imports, Movement and Distribution, Finance and Accounts,

Fertilizers Projects and Planning and Administration and Vigilance. It

makes an assessment of the individual requirements of the states and

union territories and then lays out an elaborate supply plan.

Though the soil in India is rich in silt, it lacks chief plant nutrients like

potassium, nitrogen and phosphate. The increase in the production of

fertilizers and its consumption acts as a major contributor to overall

agricultural development.
This project focuses on the demand and supply of the fertilisers.

Fertilisers and manures

For boosting agriculture output, usage of chemical fertilizers has an

important role to play. India’s soil though varied and rich is deficient in

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Nitrogen and Phosphorus which together with organic manure influence

crop return.

Increase in the population has lead to an usage of larger doses of

chemical fertilizers which is the only way to augment the food grains
production.

The New Agricultural Strategy was based on increased use of fertilizers.

Demand and Supply of Fertilisers

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Now let us see the demand and supply of the fertilizers over the years in
Indian economy.

Year Demand Supply(Tonne) Price/Tonne

(Tonne)
1951-52 70 91 758

1970-71 2260 1690 1800

1990- 91 12550 14620 2400

2000- 01 16700 16840 4600

2005- 06 20340 20828 4830

2006- 07 21651 112154 4980

Consumption of Fertilizers:

The consumption of chemical fertilizers has been growing rapidly since the
New Agricultural Strategy was adopted in the 60’s (can be seen in the
table)

In 1950-51 where it was a mere 70000 tonnes which rose up to 12.5

million tonnes in 1990-91 and likely to be 20.3 million tonnes in 2005-06.

The consumption has been erratic because of high variability of monsoon

conditions.

Graphical representation of the data:

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PRODUCTION OF FERTILISERS

The fertiliser industry has made a rapid progress during the past
decade. It has rose from a mere 39000 tonnes in 1951-52 to over 8
million tonnes in 2005-06. Though there has been a growth but its not
enough to keep pace with the growth in consumption.

There are many reasons for this:

• There has always been much delay in the setting up of fertiliser

plants in India. As it takes 8 to 9 years to complete a project
from the time of issue of the letter to intent, causing
unnecessary increase in the cost of the project.

• There is also a problem of the capital for the programme. It is

estimated somewhat between Rs.5000 crores and Rs.10000
crores would be required of which about 25 to 30% of the total
outlay would be foreign exchange component.

• The Government of India was never clear about the role of the
private sector in the fertiliser industry. There was, therefore
considerable hesitation and delay in the issue of licences to
private parties to set up fertiliser plants.

Now that the government has seen the need for an increase in
foreign investment, it has granted certain concessions to attract

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foreign capital for the fertiliser industry such as majority equity,

participation, distribution rights, etc.

But the response was poor mainly because of:

1. Profitability of exports of fertilisers to India was very high, &

2. There was uncertainty with respect to the availability of raw

materials.

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IMPORTS OF FERTILISERS

As internally there has been a shortage of fertilisers the government is

highly depended upon the imports. It has been a tremendous growth from
2.7 million tonnes in 1990-91 to 5.25 million tonnes in 2005-06.

Large imports are carried as there is scarce use of foreign exchange and
subsidies which resulted in vigorous policy of setting up fertiliser within
the country.

Internationally too , due to fertilisers becoming scare and because of oil

crises there been a drop in the imports.

Steps taken:

• Government has been promoting the consumption of fertilizers

through heavy subsidies.

• Special measures are also taken to streamline distribution of

available supplies through better transport regulated supplies to
priority crops and areas specified by the State Governments.

• Ensuring adequate supplies of wagons through high level co-

ordination with the railways provision of short term credits to states
for the purchase and distribution of fertilizers.

• Promotion of balanced use of fertilizers (through a fertilizer

promotion scheme)

• Setting up of soil testing laboratories in various parts of the country

for proper soil testing and so on.

Despite of all this India’s position is much behind other progressive

countries.

Therefore, we can come to a conclusion considering the fertilizer

consumption pattern, over the last three decades:

i. Consumption of fertilizer in India per hectare in 1950-51 was

negligible but increased to 104.5 kgs in2005-06. The corresponding
figures for some developed countries were: South Korea (400kgs),
Netherlands (275 kgs), Japan (340kgs).

ii. Absence of assured supply of water which is a primary condition for

the applications of chemical fertilizers is lacking over large parts of

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country and this acts as a hindrance to their more rapid

consumption in India.

iii. Since out of 70% only 20% is being consumed of the total
fertilizers, government has been taking steps in recent years to
increase the consumption of fertilizers in these areas...eg; the
government has sanctioned a National Project and Development of
Fertilizer use in Low Consumption Rain fed area’s in 60 identified
districts in 16 states. The programme includes field block
demonstrations; farmer’s training programmes, opening additional
soil testing laboratories and additional retail outlets.

iv. Rabi crops (food and non-food) which contribute to 1/3rd of

agricultural production, account for 2/3rd of fertilizer consumption.
This is largely due to more assured availability of irrigation of sub-
soil moisture for rabi crops.

v. There has been a steep rise in fertiliser subsidies from Rs.600

crores in 1979-80 to Rs.4400 crores in 1990-91 and to Rs.22450
crores during 2006-07.

vi. The use of plant nutrients received scant attention in the past. The
sharp increase in the international fertilizer prices has compelled the
government to divert attention to greater use of organic manures.

Roughly if we see, one third of cow dung is not collected and one third
is used as fuel by the villagers; and the amount actually collected and
used is about 340 million tonnes.

At present, cattle urine which has valuable manorial properties is

completely wasted. If it is mixed with cow dung the available manure
will be about 400 million tonnes.

This type of provision to the rural population will help to increase the
availability of farmyard manure.

Beside, the more use of this will help in making organic manures
available to the cultivator.

Also a great scope for the manufacturer is there as he can compost

from the urban waste, forest litter and other waste materials and also
for use of green manures.

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This will help in reducing our dependence on chemical fertilizer as it is

naturally available to us. In fact, there is growing awareness among
farmers of the importance of organic farming.

ELASTICITY OF DEMAND AND SUPPLY

Demand for a good depends not only on its price, but also on consumer
income and on the prices of other goods. Likewise, supply depends both
on price and on variables that affect production cost. Elasticity measures
the sensitivity of one variable to another. Specifically, it is a number that
tells us the percentage change that will occur in one variable in response
to a 1-percent increase in another variable.

Price Elasticity of Demand:

It is the percentage change in quantity demanded of a good resulting

from a 1-percent increase in its price.

where,

simply means “percentage change in Q” and means “percentage

change in P”

The symbol is the Greek capital letter delta ; it means “the change in”.
So X means “the change in the variable X”, say from one year to the
next.

The percentage change in the variable divided by the original level of the
variable.

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Elasticity of Demand:

 Number and closeness of substitutes :

Here, the number of substitutes for fertiliser is more i.e for organic
fertiliser which is very rare to find due to firstly wrong government
policies and no support from them either, secondly due to high
variability of monsoon conditions in India. Therefore, it is elastic in
nature i.e it has more substitutes.

 Price of the product:

Here, if we get fertilisers at a subsidy rate provided by the government

the elasticity will be lower. This means that companies will have
various options available which will lead to fluctuation of the price. As
we know that if the demand is elastic, an increase (decrease) in price
will lead to decrease (increase) in total revenue.

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ELASTICITY OF DEMAND

CROSS PRICE ELASTICITY INCOME ELASTICITY

CROSS PRICE ELASTICITY:

A measure of the responsiveness of the demand for a good to changes in

the price of a related good; the percentage change in the quantity
demanded of one good divided by the percentage change in the price of a
related good.

It can be positive or negative.

Here, the cross price elasticity will be positive because goods are having
substitutes available.

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INCOME ELASTICITY:

A measure of the responsiveness of the demand for a good to changes in

consumer income; the percentage change in quantity demanded divided
by the percentage change in income.

INCOME ELASTICITY

NORMAL GOODS INFERIOR GOODS

NECESSARY LUXURIOUS

Here, our product is a normal good and in it, it is a necessary good i.e
one cannot do without the product.

Necessary goods have income elasticity less than one.

ELASTICITY OF SUPPLY:

The responsiveness of supply changes as there is a change in the price.

It is inelastic if the suppliers don’t adjust to the change in price.

It is elastic if they react quickly to the change in price.

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BIBLOGRAPHY

Microeconomics 7th edition by Robert S Pindyck, Daniel L. Rubinfeld and

Prem L. Mehta

Irrigation and other agricultural inputs

Indian Economy – K.P.M Sundharam and Ruddar Datt.

WIBLOGRAPHY

www.investopedia.com

www.economywatch.com/indian-fertilizer-industry/

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