News 7 Feb 13 CABINET COMMITTEE CLEARS NEW UREA INVESTMENT POLICY

CABINET COMMITTEE CLEARS NEW UREA INVESTMENT POLICY

(The policy aims at ineentivioitta to nut-up new pianbil)

The Cabinet Committee on Economic Affairs on December 13, 2012 approved a urea investment policy which is likely to incentivise fertiliser companies to set-up new plants and expand existing capacity.

India imports over 30 per cent of its urea requirements and the policy aims at reducing that. But it is unlikely to have any impact on existing prices.

The policy, which aims to attract fresh investment of about Z 35,000 crore to increase domestic production by eight million tonnes, has been cleared as the previous policy failed to attract the much needed funds.

Under the new policy, the government will give 12-20 per cent post-tax return on fresh capital infused by the manufacturers for setting up of new plants as well as for expansion and revamp of the existing ones.

To ensure this return, the government would cover the entire cost of natural gas, which is the main feedstock of urea, and accounts for 80 per cent of the cost. The government controls the urea sector and has fixed the Maximum Retail Price (MRP) at 5,360 a tonne.

The difference between the MRP and the cost of production is given as subsidy to manufacturers.

For determining the cost of production of new plants to be set up after the policy comes into effect, the government has set a floor and ceiling price of urea, based on the price of natural gas plus 12-20 per cent equity returns.

The importance of the National Investment Board, now renamed the Cabinet Committee on Investments (CCI), rests here. (Its) clearance for the CCI will now hopefully ensure that some of this gargantuan backlog is dealt with. The CCI proposal was circulated by Finance Minister P. Chidambaram as a cabinet note, around the same time that the commerce minister issued the press note for FDI in multi-brand retail. The slow progress of both proposals illustrated that the objection to reformist ideas can emanate from the opposition as well as the ruling party.

The cabinet approval for the CCI will, of course, have to fine-tune some issues. For instance, there will soon be clarity on whether all investment plans of above 1,000 crore will travel to the CCI, or only those where all other options have failed, including a reference to the cabinet and the cabinet committee on economic affairs. Also, since all ministers from the infrastructure sector will be part of the CCI, it stands to reason that some of the Groups of Ministers (GoMs) could be disbanded. The key change, however, should be the collective recognition that once the .CCI takes on a project, it will provide the final seal of approval."