Context:
Recently, the union government has brought di-ammonium phosphate (DAP), muriate of potash (MOP), and all other non-urea fertilizers that receive nutrient-based subsidy (NBS) support under “reasonable pricing” controls.
- Urea is already under the price control mechanism with its Maximum Retail Prices (MRP) fixed by the government.
More about the decision taken by the Government:
- Till now the non-urea fertilizers were decontrolled under the NBS Scheme.
- But now the Department of Fertilizers (DoF) has issued comprehensive guidelines for assessing the “reasonableness” of MRPs for all non-urea fertilizers covered under the NBS Scheme.
These guidelines, effective retrospectively from April 1, 2023, specify maximum allowable profit margins for fertilizer companies:
- 8% for importers,
- 10% for manufacturers, and
- 12% for integrated manufacturers (those producing finished fertilizers as well as intermediates such as phosphoric acid and ammonia).
Companies that earn “unreasonable profit,” exceeding the stipulated percentages in a specific financial year (April-March), are required to refund the excess amount to the DoF by October 10 of the following fiscal year.
If the refund is not made within the specified time limit, “an interest at 12% per annum on a pro-rata basis” will be charged on the refund amount from the next day of the end of the financial year.
- E.g.- in case of FY 2023-24, the interest would be charged from April 1, 2024
The unreasonable profits will also be adjusted against subsequent fertilizer subsidy payments by the government.
Thus, the new guidelines impose indirect MRP controls on non-urea fertilizers by capping the profits that companies can earn from their sales.
About NBS Scheme
- Under the NBS scheme, introduced in April 2010, the MRPs of non-urea fertilizers are supposed to be determined by the market and set by individual companies selling them.
- The government merely pays a fixed per-tonne subsidy on each of these fertilizers, linked to their nutrient content or a specific percentage of nitrogen (N), phosphorous (P), potassium (K), and sulphur (S)
- Unlike the earlier product-specific subsidy regime, the subsidy system based on nutrient content aims to encourage balanced fertilization by discouraging farmers from using too much Urea (46% N), DAP (46% P plus 18% N), and MOP (60% K), which have high concentrations of a single nutrient.
- NBS was designed to stimulate product innovation and promote the use of complex fertilizers (having lower concentrations of N, P, K, and S in different proportions) and SSP (containing only 16% P but also 11% S)
Mechanism for Assessment of Companies’ “Unreasonable Profit”
- The guidelines require fertilizer companies to conduct a “self-assessment” of unreasonable profits, utilizing the cost auditor’s report and audited cost data approved by their board of directors.
- This report and data must be submitted to the Department of Fertilizers (DoF) by October 10 of the subsequent fiscal year.
- The DoF will then scrutinize the “reasonability of MRPs”, as presented by the companies, “by 28th February for each completed previous financial year.”
- Subsequently, the DoF will prepare a report on any unreasonable profits identified, specifying the amount to be recovered from the companies.
Significance of New Guidelines
The recent guidelines indirectly regulate the MRP of non-urea fertilizers by limiting the profits companies can derive from their sales.
- This limitation will be determined by their “total cost of sales”, which would cover the cost of production/import, administrative overheads, selling and distribution overheads, as well as net interest and financing charges.
- Deduction for the dealer’s margin will be permitted up to 2% of the MRP for DAP and MOP, and 4% for all other fertilizers covered under the NBS scheme.
Thus, the new guidelines basically expand the system of detailed cost monitoring and price control, currently applicable to Urea, to encompass other fertilizers.