By Vipin Agnihotri
Increasing cost of production and delays in subsidy payments has stymied capacity addition in the Indian fertilizer industry over the last few years. But with the Indian government mulling a new subsidy regime, fertilizers promise to get hot again.
It is worth mentioning in this regard that last month, Reliance Industries Chairman Mukesh Ambani met Fertilizer Secretary JS Sharma and presented his proposal to setup a 2-million tonne fertilizer unit in the country. According to sources, Ambani projected a 30 per cent return from the business.
This is absolute magic because the rest of the industry is not able to hit even double-digit returns. In my opinion, this is just a preview of the changing face of the Rs 43,000 crore Indian fertilizer sector that will be driven by a new policy initiative that the Indian government hopes to finalize in a few months.
In theory, IFFCO, a co-operative and the largest fertilizer producer in the country has margins of under 2 per cent. If experts are to be believed, the investment climate has been gloomy over the last few years. As a matter of fact, private sector majors like KK Birla's Chambal Fertilizers & Chemicals and the Tata Group's Tata Chemicals are also only revamping their existing facilities rather than investing in new ones.
But all this will change thanks to the Indian government move of getting rid of cost-based, fixed returns regime and usher in deregulation and import parity pricing. This is the real reason due to which Mukesh Ambani is eyeing the fertilizer sector. Mukesh Ambani holds all the aces- his big gas finds in the Krishna Godavari Basin, at peak production, can meet the complete short fall in supplies.
But the fact of the matter is that agricultural growth of India has been stagnating over the last ten years or so and without a growing market, all this means little. To counter this situation, Prime Minister Manmohan Singh has already announced an Rs 25,000 crore package. The pivotal factor here is that pumping money into the agriculture sector or improving returns for fertilizer companies alone will not help. It is of paramount importance that Indian government made some structural changes as well.
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