FERTILIZER SITUATION IN INDIA AND FUTURE PROSPECTS

Background:

As late as 1980, per capita food supplies were much below adequate in over 50 developing countries. More than half of these were the predominantly rural, low income countries of South Asia, China, and Sub-Saharan Africa. The issue facing them was to find a proper balance between satisfying immediate human needs and building political and economic systems in which individuals can, in the future, acquire the means to satisfy their own requirements.

For India with a population of 17% of the worlds population (1.1 billion) spread across only 2.3% (329 mn ha) of Worlds area, this problem has been giving a far greater challenge. 60% of Indias population is still dependent on agriculture. No other sector has wielded such an influence directly due to its effect on the majority of population and indirectly due to its ability to redefine consumer spending of rural households and thus drive other sectors of the economy. For a huge population increasing at fast pace, providing food has been the most critical need conforming to the famous Byzantine proverb

One who has bread has many problems, He who has no bread has only one problem

Hence, food first became the primary task at the hands of the Indian Government and the food security its most solemn objective. On this front, India had an ominous start of facing famine at the dawn of its Independence and since then the nation found itself with a begging bowl getting food from the rest of the world.

Policy Measures for Food Security in India

To fulfil the task and meet the objective of food security, increasing food grain production assumed topmost priority before the Government in the Fifties and early Sixties. During those periods there were hardly any worthwhile technologies available to get a break through in this area. In the mid Sixties a young scientist in the other part of the globe i.e. in Mexico was assiduously pursuing serious research and had achieved a break-through by developing a high yielding variety of seed which in combination with irrigation and chemical fertilizers did wonders. He was none other than the celebrated Norman Borlaug who transformed the world food and agriculture scene. India was perhaps the first country to have caught fancy of his work and put to practice by launching a lofty revolution called Green Revolution.

Green Revolution envisaged a quantum jump in food grain production and that was possible only through extensive use of chemical fertilizers. However, for mostly poor farmers of India whose land holdings have been small (80% of Indian farmers are small and marginal having less than 2 hectares of land), the affordability to buy the inputs particularly fertilizers at high cost became a serious problem. Government, therefore, adopted a positive 2

interventionist policy to provide fertilizers to the farmers at affordable price. Side by side, the need to create an investment friendly environment to increase the indigenous production of fertilizers in the country was also strongly realized as it was difficult to handle large volume of imports and insulate the country from wide fluctuation in international prices of fertilizers.

The interventionist policy of the Government culminated in the formulation of the Retention Price-Cum-Subsidy (RPS) scheme, which has dominated fertilizer scene from 1977 to the year July 1992 for all fertilizers and up to March 2003 for urea. Under the scheme, the Retention Price or the cost of production was decided on the basis of norms and actuals providing reasonable return on net worth to the producing companies and induce efficiency at the same time by tightening norms. The freight to move the fertilizers up to the consumption point was also worked out on normative basis. The maximum Retail Price (MRP) net of distribution margin was

deducted from the total of the above two (cost of production and freight) and industry was compensated by this amount called subsidy.

Although RPS era was highly controlled, it witnessed spectacular increase in fertilizer consumption from a meagre level of 0.07 mn Mts of nutrients in 1950-51 to 2.9 mn Mts in 1975-76 and further to 20.3 mn. Mts in 2005-06. Fertilizer production also witnessed a steep increase from a meagre level of 0.04 million mts in 1951-52 to 1.8 mn mts in 1975-76 and further to 15.5 mn mts in 2005-06. Consequently during these periods, food grain production

registered quantum jump from 52 million tonnes to 121 million tonnes and further to 208 million tonnes. Figure-1 graphically shows the trends. Figure 1
Fertilizer production,consumption & Foodgrain production
25000 250000

20000

200000

15000

150000

10000

100000

5000

50000

0 1950-51 1960-61 1970-71 1975-76 1980-81 1990-91 1996-97 2000-01 2002-03 2003-04 2004-05 2005-06 Fertilizer Production N+P 000 MT Fertilizer Consumption N+P+K 000 MT

Food Grain Production 000 MT

Source: Fertilizer Statistics 2005-06, FAI

Indian Fertilizer Industry: Current situation

Notwithstanding accomplishment of RPS era, Government was exploring alternative to this dispensation in the wake of economic liberalization in India in 1991. In 1992, the Phosphatic and Potassic fertilizers were

decontrolled. However, a concession scheme has been operative for these fertilizers also which means the cost of production / import is worked out on normative basis and MRP is fixed by the Government. The difference

between the two is paid to the Industry in the form of concession. For Phosphatic and Potassic fertilizers this scheme is still operative. However,

FOODGRAIN in '000 MT

FERTILIZER in '000 MT

for Urea, RPS system remained in vogue till March 2003. From April 2003 New Pricing Scheme (NPS) has come into force which is a modification of the RPS wherein the Unit Specific Subsidy of RPS has been replaced by a group based concession.

Indian Fertilizer Industry is highly heterogeneous in terms of vintage, feed stock use and technology. It is, therefore, difficult to prescribe uniform rate of concession for all fertilizer plants and hence under the NPS, Urea Plants have been put into groups to reduce the heterogeneity. NPS is operative till March 2006 only and hence the policy beyond this period is underway. In the proposed policy further modification in NPS is being contemplated to promote further efficiency and to attract investment in fertilizer sector. For Phosphatic & Potassic fertilizers also, group concept has been introduced and plans are afoot to make it more normative in nature.

Over the years, with the positive intervention of the Government and Industrys proactive response, Indian Fertilizer has come a long way to be a vast, mature, highly efficient, forward looking and progressive segment of the Indian Industry today. Today, India is the third largest producer and consumer of fertilizers in the world. Indian Fertilizer Industry compares well with fertilizer industry in any country in terms of efficiency. IFA survey of 2003 shows the average energy of 9.06 GCal/MT realised by 41 gas based Ammonia plants in the World whereas the average energy of gas based Ammonia Plants including those on mixed feedstock is 8.65 GCal/MT in India.

Indias role in World fertilizer trade

Being a major producer and consumer of fertilizer, India holds dominant position in World fertilizer trade. In case of Urea, although India is self sufficient to the extent of 90-95%, at a huge base even 5-10 % is a significant volume of import. This year, taking into account 1.6 million tonnes of Urea from Oman India Fertilizer Company (OMIFCO) in the Sultanate of Oman, a Joint Venture Company of IFFCO, KRIBHCO from India and Oman Oil Company from Oman, India had to import about 4.5 million tonnes of Urea. Of course, this year demands have been exceptionally high due to favourable agro-climatic conditions throughout the country. In Phosphatics also at the self sufficiency level of 80%, India has to import significant quantities. Even for indigenous production of phosphatics, the country has to import large quantities of raw materials and intermediates. This is due to limited resources of raw materials required for phosphatics, i.e., rock phosphate and sulphur in the country. Even intermediates like phos acid and ammonia are imported for indigenous production of phosphatics. In case of potassic fertilizers, entire requirements are imported only as India does not have commercially exploitable resources of these fertilizers.

Volume of imports of fertilizers, raw materials and intermediates can be seen from Table-1.

Table-1:

Import

of

finished

fertilizers

Raw

Materials

Intermediates

(in 000 MT) Year Urea DAP MOP Rock Sulphur Ammonia Phos acid 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 --220 119.4 143.1 641 2,057 861 933 383 734 644 2,438 2,646 2,810 2,603 2,579 3,409 4,577 4,315 4,934 4,944 3,579 4,845 4,816 1,807 1,957 1,807 1,766 2,010 1,962 1,289 1,501 1,518 1,326 1,618 1,628 2,179 2,210 2,403 2,392 3,353 2,572

Source: Department of Fertilizers, G.O.I., New Delhi

Arab countries play significant role in meeting the import need of India as this region abounds in the natural resources required for production of fertilizers.

Stagnation in growth of Indian Fertilizer Industry: If we follow the growth of fertilizer industry in India we find that it has hit the worst patch in 21st Century as can be seen from figure-2. No new plant has been added nor has any expansion taken place since 1999.

Figure-2
Urea Production in India
25000

20000

Urea Production in '000 MT

15000

10000

5000

0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Year

Source: Fertilizer Statistics 2005-06, FAI

This leads to a legitimate question that if fertilizer industry in India is so well established then why there has been no investment and hence no growth in the fertilizer sector in this phase. It is a fact that modifications in the RPS and NPS in vogue since 2003 have not encouraged investment in the fertilizer sector. The biggest bottleneck has been the decline in availability of natural gas, the preferred feed stock for fertilizer production. Even the existing gas based units are not getting adequate gas for their optimum production (shortfall of 7 MMSCMD). If the existing naphtha / furnace oil / LSHS based plants have to convert to gas, they require additional 28 MMSCMD. The fertilizers based on the Liquid Hydrocarbon are

comparatively high cost giving rise to increase in subsidy and the consequent reluctance of the Government to pick-up the bills. Today even though 53%

of fertilizers is produced using natural gas / LNG, they account for 25% of subsidy. Even gas based plants are forced to use Naphtha for fuel or even feed stock purpose and 13% of production is on mixed feed which also has a share of 13% in subsidy.

It is true, that subsidy on fertilizers in India has been steeply going up but it is not due to inefficiency of Indian Fertilizer Industry. The main reason has been the increase in the cost of inputs and not making corresponding corrections in the price of outputs i.e MRP of fertilizers. Table 2: shows the relative variation in the prices and this explains the reason for burgeoning increase in fertilizer subsidy in India. Table-2
Year Gas price (Basic) INR / 000 Cubic Meter % Variat ion Furnace Oil INR/KL % Variat ion Naphtha price INR / MT % Variatio n LSHS INR/MT % Variatio n MRP % Variation

1991 1992 1994 1997 1998 1999 2000 2002 2003 2004 2005 2006

1400 1550 1750 2150 2411 2499 2850 2850 2850 2850 3200 3200

10.71 12.90 22.86 12.14 3.65 14.05 0.00 0.00 0.00 12.28 0.00

1850 2812 2812 5143 5570 6830 9240 9807 12216 11163 14166 15846

52.00 0.00 82.89 8.30 22.62 35.29 6.14 24.56 -8.62 26.90 11.86

2726 3723 3723 7624 7475 9825 15295 14979 13597 17500 22263 26820

36.57 0.00 104.78 -1.95 31.44 55.67 -2.07 -9.23 28.70 27.22 20.47
883.86

1854 2852 2852 6089 5970 7265 9845 10532 11780 11936 14752 16680

53.83 0.00 113.50 -1.95 21.69 35.51 6.98 11.85 1.32 23.59 13.07
799.68

3060 2760 3320 3660 3660 4000 4600 4830 4830 4830 4830 4830

-9.80 20.29 10.24 0.00 9.29 15.00 5.00 0.00 0.00 0.00 0.00
57.84

Overall Variatio 128.57 756.54 n Source: Fertilizer Statistics 2005-06, FAI

Mistaken impressions about fertilizer subsidy in India:

At this high level of subsidy two impressions have been created. First that subsidy is very high in Indian Agriculture and second that most of the subsidy goes to benefit the Industry and not the farmers.

In Indian agriculture emphasis has been laid to provide subsidy on inputs to the farmers due to small land holdings and consequent need to reduce the cost of farming. On output there is subsidy through the mechanism of

Minimum Support Price only. Of course, there are some States who provide Concessional / free water, electricity for agricultural use. If we combine all these subsidies, the total subsidy in Indian agriculture is much less than what is permitted under WTO and far less than what developed countries provide. The subsidy on agriculture in India vis--vis some developed

countries can be seen in Table 3

Table

3:

AGRICULTURAL

SUBSIDIES

(PRODUCER

SUPPORT

ESTIMATE) IN SELECTED COUNTRIES (US$ Million)

Country

1990

1995

2000

2001

2002

2003

2004( Provisi onal )

European Union Canada

102,76 0 6,963

126,51 7 4,155

86,018

83,34 3

91,407

118,02 8

133,38 6 5,714

4,456

3,660

4,798

6,051

10

Country

1990

1995

2000

2001

2002

2003

2004( Provisi onal )

Japan

42,57 6

73,25 3 25,106 20,180

53,77 2 19,306

44,69 9 16,182

44,162

47,87 4

48,73 7 19,849 46,50 4

Korea USA

19,222 31,618

17,575 39,105

17,334 35,618

53,67 51,838 0

India*

3,812

3,621

5,660

6,355

7,272

8,062

9,251

Source: Fertilizer Statistics 2005-06, FAI

As for the other mistaken impression that subsidy largely goes to fertilizer industry in India, it should be understood that fertilizer companies sell fertilizers to the farmers at subsidized rates and Government compensates the Companies for the same. Thus, to the Industry, it is the compensation and not the subsidy. We can say that subsidy to the farmers is routed

rough the industries and that is for the ease of administering the scheme. There is serious thinking in India to evolve an alternative modality to dispense subsidy to the farmers directly through the use of Smart Cards or other IT enabled mechanisms.

Need for paradigm shift to meet future challenges Although there is phenomenal increase in production of food grain in India, it has not kept pace with the rise in population and is not enough to meet the requirement of the burgeoning population. The population is still increasing at the annual rate of about 1.5%. We are adding one Tunisia every year in 11

the population. Thus the need for higher food grain production is ever increasing. In fact, of late, the buffer stocks of food grain are getting depleted and this year, India is importing large quantities of wheat after a gap of six years at exorbitant prices.

For the growing population and improving standards of living, food grain need is going to increase substantially in the Country. With limited availability of net cropped area (which is only 30% of the total geographical area), and that too going down due to more and more urbanization and not much scope for increase in irrigation, the only way the food grain targets can be achieved is through increasing the farm productivity. Today there is peculiar contradiction in the economic development in India. While GDP is increasing at fast pace of 9-10%, the agricultural growth has been sliding down from 4% in 1980s to 3.2 % in 90s to 1.8% at present. At the same time, the proportion of population dependent on agriculture is not coming down. This means the farm income is taking a beating while other sectors are flourishing.

For an inclusive growth, the agriculture sector has to grow at a faster pace and Government has kept a target of 4% annual growth for Agriculture in the 11th Five Year Plan (2007-08 to 2011-12). Although, food security will be important but there has to be paradigm shift from only food security to enhancement of farm income and consequent empowerment of farmers in India. This is what is being talked about as the Second Green Revolution in India. This sets the future trend of Indian agriculture and Indian Fertilizer Industry has to conform to this. 12

Measures for improving farm income To improve the farm productivity, Indian Fertilizer Industry will have to get involved with farmers in laying greater emphasis on certain important agricultural activities. Beginning has to be made with improving soil-testing services, diagnosing soil health appropriately and prescribing appropriate soil amendments so that nutrient application is more and more based on soil health. Soil testing for deficiency of major, secondary and micro-nutrients will have to be undertaken and infrastructure will have to be set up to create these facilities so that farmers have access to the desired information. This will need better collaboration between the fertilizer

industry and Government agencies. As has been suggested by some experts, soil fertility data bank needs to be created through a net-work of all soil testing laboratories at the national level. This will provide a base for

preparation of periodic soil fertility summary and maps.

Water, the world over, is a scarce resource and every drop needs to be utilized. Despite normal monsoon conditions, much of the land in India is still rain fed. There are not enough adequate irrigation facilities to tap the water available. This impacts the resilience of the farmer in the event of a monsoon failure. More attention needs to be paid to developing microirrigation facilities which will enable the available water to be used fully. Rain water harvesting also is one area which has to be revived in a big way. Micro irrigation systems will also enable fertigation which is a far more efficient way to manage water.

13

Based on the soil health, and the crops to be grown, a customized mix of fertilizers will have to be provided to the farmers for optimal crop response. For this there is a need for balance between the use of organic and inorganic fertilizers. While inorganic fertilizers provide the desired nutrients for yield, organic fertilizers seek to improve the soil chemistry for balancing the nutrients for uptake by crops. A mix of two types of fertilizers is required so that soil health is maintained on the one hand and productivity is improved on the other. Secondary and micro-nutrients will also have to be provided in desired proportion and the industry has to come out with a range of these products to alleviate specific deficiencies. It will also call for a better pestmanagement system. Thus an integrated approach to nutrient and pest

management systems will have to be adopted so as to protect and improve the land, water & bio-diversity and climate resources essential for sustained advances in the productivity, profitability and stability of the farming systems.

To enhance the farm income, farmers have to be induced for crop diversification to take up horticulture and floriculture on commercial scale. This will also enable the country to emerge as a major exporter of these products. The fertilizer companies should encourage such diversification by providing appropriate agronomic packages to the farmers.

The small and marginal farmers in India suffer from the requisite finance to use the modern farming technologies. They also suffer from the capacity to take risk involved in agricultural activities. Therefore, outreach and efficiency of financial services will have to be improved through an efficient 14

credit delivery system. Similarly, user friendly insurance instruments covering production right from sowing to post-harvest operations will have to be provided for insulating farmers from financial distress and making the agriculture financially viable. It will help Fertilizer Industry to diversify in these areas so as to elicit better involvement of the farming community.

In view of small farm holdings, one of the assured ways of increasing the farm income is to encourage Contract Farming. This means a symbiotic

contract which confers benefits to both producers and purchasers and will be ideal for ensuring remunerative market opportunities. The contract

farming based on a well defined Code of Conduct will be helpful to small producers in getting good quality inputs and good as well as prompt payment for their produce. The Fertilizer Industry will have to get involved in

contract farming particularly on input side.

Thus larger quantities of food grain will have to be produced from reduced area and saved area will have to be utilized for horticulture and floriculture to improve farm income. The reality of utilization of land for industrial activity will also have to be kept in mind.

Future Demand-Supply Scenario With the increasing need for food-grain production and with the paradigm shift to improve farm income, the fertilizer consumption in India has to go up at significant pace. Several models have been adopted for projecting

future demand of fertilizers in the country by several agencies of the Government including Planning Commission. The Fertilizer Association of 15

India (FAI) has developed a multiple regression model based on factors like irrigated area, area under high yielding varieties, fertilizer prices, rain fall as percentage of long term average value, fertilizer nutrient prices and lagged dependent variable (fertilizer consumption in the previous year). Based on this model, estimated demand of fertilizer nutrients up to the end of the 11th Five Year Plan i.e. 2011-12 is given in Table-4. If the production is pegged at the current levels, then the demand supply gap assumes staggering proportion explained by the same Table. Table-4 Year Demand N+P+K 23125 24085 25035 25960 26900 Supply of N + P 16950 17585 18595 19912 19965 In 000 MT Demand of K Demand Supply Gap N+P+K * 2660 2805 2965 3130 3300 8835 9305 9405 9178 10235

2007-08 2008-09 2009-10 2010-11 2011-12

Source: Fertilizer Association of India. * Demand of entire K is met through imports.

It is impossible to meet the Demand-Supply gap with imports only, given infrastructure constraints at ports and inland. Hence increasing more capacities particularly within the country is imperative.

On feedstock front, interesting developments are taking place in India which ushers new optimism in the growth of fertilizer industry in the country.

16

Reliance Industries Limited (RIL), the leading Indian Company has discovered worlds largest offshore gas field in Krishna-Godavari Basin off East Coast of India in the year 2002. Initial difficulties having been

overcome, there appears to be definite prospect of 40 mmscmd gas coming onshore in the year 2008-09 and another 40 mmscmd in the year 2011-12. Besides RIL, other companies like ONGC and GSPC are also coming up with new sources of gas. In fact, RIL's gas itself is going to transform the power and fertilizer scene in India. The prospect of early conversion of Liquid Hydro Carbon based fertilizer plants has brightened. The availability of gas should be enough to not only allow De-bottlenecking and expansion of the existing gas based plants but also enable setting up new plants at the location where mostly coal / naphtha based plants are lying closed.

Although there is good scope for capacity growth within the country, Indian fertilizer industry is also looking for Joint Ventures abroad particularly for phosphatic and Potassic fertilizers as India suffers from the limitations of the raw materials required producing them. Indian companies have set up Joint Ventures in Oman, Tunisia, Egypt and Morocco.

Conclusion

Fertilizers have played very important role in achieving the objective of Food Security in India. Positive interventionist policies of the Government have promoted consumption of fertilizer production within the Country and consequent manifold increase in food grain production. However, given the state of Indian Agriculture today, merely food security is not enough. To 17

bring desired growth, farm incomes have to go up substantially and this calls for paradigm shift in agricultural practices and policies of different sectors concerned. More emphasis has to be on productivity. Fertilizers will continue to play important role in that. Fertilizer Industry will have to reposition itself to understand the emerging needs and work in tandem to meet them. Emphasis on productivity is going to spur demand for fertilizers. There has been a concern on the supply side particularly on no growth in fertilizer production within the Country. However, the recent discoveries of natural gas and fast work on production and connectivity are ushering new hopes in this direction and the Country is poised for significant growth within the Country. Even then fertilizer industry in India is looking for opportunities in other countries to augment supplies. Thus, the future of Fertilizer Industry is bright in India and it has to play yeomans role in bringing sustained growth in Indian agriculture and consequently Indian economy.

*****

18