The Political Economy of Agricultural Policy Reform in India

72 CHAPTER 6

The Fertilizer Industry, Variation in Feedstock Use, and Producer Interest

Although the industry strongly influenced the debate on fertilizer subsidy and reforms, the inability of the government to decontrol urea is not entirely an outcome of the lobbying or financial power of the fertilizer industry: several other factors influence the issue.

As discussed above, the cost structures of fertilizer units and the retention prices associated with them vary widely. Between 60 and 70 percent of the total cost of production goes to energy costs, and total spending on energy accounts for almost 90 percent of the variable cost of production of urea (FAI 1995). The retention prices of units reveal that units that use natural gas as feedstock have, on an average, lower retention prices than those that use naphtha, fuel oil, and other feedstock. To look at differences in interests, it makes sense to classify urea producers into categories according to feedstock use. Sixty-six percent of urea manufacturers use natural gas as feedstock, a little less than 30 percent use naphtha, and the rest use other feedstock, such as fuel oil and LSHS. The units that use natural gas are the most efficient and, in general, use a smaller subsidy than the naphtha-based manufacturers. Arguably, a high-cost producer is more likely to resist market-oriented reforms than a more efficient and lower-cost producer. Under a decontrolled policy framework for urea, the naphtha- and fuel-oil-based plants would not be able to compete with imported urea (ERC 2000). Thus there is a strong and obvious reason for the naphtha-based manufacturers to lobby for the continu- ation of the RPS. However, the nature of the interest articulation process in the fertilizer industry makes it difficult to prove that it is indeed only the naphtha-based manufacturers who have lobbied the government. Further- more, even gas-based manufacturers have a strong interest in lobbying for the status quo. The supply of subsidized natural gas has been decreasing, and the pricing of natural gas may likely be determined by market forces in the future. It is not clear how many producer units will remain viable in the face of imports if natural gas prices are completely decontrolled. Consistent with this expectation, we find that regardless of the feedstock used, urea manu- facturers lobby the government in order to protect their objectives. However, it would be wrong to conclude that only naphtha-based units had an interest in resisting a change in the subsidy regime. Because the pric- ing and availability of natural gas were uncertain, gas-based manufacturers also had reason to lobby for a continuation of the status quo until the govern- ment’s overall policy on fertilizers was clear.

Overall, India’s gas-based manufacturers have been found to be globally competitive (Gokak Committee 2003, 19–21). However, that conclusion was

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