Don’t block sale of fertiliser PSUs

Pursuant to the government’s approach to privatisation of Central Public Sector undertakings, or CPSUs, as announced in the 2021–22 Budget, the Department of Public Enterprises (DPE) and Niti Aayog have identified 176 CPSUs in the non-strategic sectors. They have recommended that over 60% of them, or 106, be wound up, while the rest, considered “viable units,” should be privatised.

Fertilisers are placed in the non-strategic category. Accordingly, the DPE and Niti Aayog have recommended the privatisation of all nine CPSUs, including Madras Fertilizers (MFL) and National Fertilizers Limited (NFL), which are under the administrative control of the Ministry of Chemicals and Fertilisers. However, the latter has opposed it.

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But why is the ministry opposing privatisation? First, being a crucial input for farmers to increase crop production, fertilisers are politically sensitive, and the ruling party can’t take any chances in ensuring their adequate availability in every corner of the country. In view of this, if the government has manufacturing units directly under its control, it can always ask them to increase production whenever it apprehends a shortage. This won’t be possible if all these are in private hands. Going by this logic, the government could place fertilisers in the ‘strategic’ category, wherein, it can retain at least one and a maximum of four enterprises in the public sector. However, this won’t be necessary as
‘adequate’ and ‘effective’ mechanisms are already in place to guard against a shortage situation.

The Department of Agriculture and Cooperation (DoAC) assesses the requirement of all fertilisers for each cropping season, i.e., kharif (April to September) and rabi (October to March), in consultation with fertiliser manufacturers, the fertiliser ministry, states, and the railways. The requirement is broken down month-wise, and the supply, movement, and distribution of all fertilisers are monitored through the Web-based Fertiliser Monitoring System (FMS). The government can always direct any manufacturing unit, even if privately owned, to increase supplies to meet shortages, if any. The latter can’t refuse because the government controls its subsidy support--the reimbursement of the excess cost of production and distribution over the MRP.

Secondly, India imports 25–30% of its urea requirement, and urea is imported only through designated State agencies, primarily CPSUs like the NFL. The government may feel comfortable asking PSUs to import urea to effectively manage supplies. It will lose this comfort if there is no fertiliser enterprise left within its fold after privatisation. However, this argument is specious.

India also imports non-urea fertilisers where the dependence on import is much higher, viz., di-ammonium phosphate (DAP): 50%; muriate of phosphate (MoP): 100%. Any entity, including private firms, is free to import DAP and MoP. Yet, the country hasn’t faced any shortage of these fertilisers. Similarly, even when urea imports are left to them, there won’t be any problem.

Third, under the New Pricing Scheme (NPS) of allowing cost and, in turn, subsidy (cost minus MRP) for urea, the officials in the fertiliser ministry determine how much of each cost component, such as capital-related charges or CRC (including interest, depreciation, and return on equity capital), other fixed costs, cost of gas and other inputs, etc., is to be allowed for subsidy payment to each unit.

Generally, units under CPSUs are allowed a higher cost and a higher subsidy on every tonne of urea produced to accommodate their inflated expenses.

For instance, six years ago, the Modi government approved revival plans for five plants under the Fertiliser Corporation of India Ltd (FCIL) and the Hindustan Fertiliser Corporation of India Limited (HFCL), namely Sindri (Jharkhand), Gorakhpur (Uttar Pradesh), Barauni (Bihar), Talcher (Odisha), and Ramagundam (AP). Their revival couldn’t be justified on financial viability considerations, yet these were approved because of their location in politically sensitive areas.

Entailing an investment of around Rs 40,000 crore, these plants were commissioned in 2021–2022. Given the high CRC associated with the high invested capital (Rs 8,000 crore per plant on average), their viability can be protected only if they continue to get an inflated retention price under the NPS. The big question is, will they, even after disinvestment? If not, the government won’t get suitors.

Investors could come in only if the valuation is kept low. But that will not bring in the investment needed for their revival. Such a deal could invite criticism. This may be the reason behind the ministry’s opposition to privatisation.

The fertiliser ministry’s concern about securing adequate supplies is unwarranted. As for selling CPSUs housing high-cost plants, the government should tell the suitor that the inflated price under NPS won’t continue. Instead, it may accept a lower valuation, a price worth paying now to avoid the cost of retaining them under the public sector fold.

(The writer is a policy
analyst)