Urea: Make or Buy

The policymakers are pondering over a question whether it is worth “making” urea at $ 400 per tonne or more when you can import (“buy”) at under $300?. Other sections advocate for achieving self-sufficiency in this critical nitrogenous fertilizer.

Why India must augment the capacity of local production?

• The domestic production cost also involves customs duty and other levies (both Central and state government) on feedstock; natural gas isn’t covered under the goods and services tax regime. If all these components are considered the total production cost, too, reduces to $ 368-388 per tonne (from $ 415-435).
• It is not a sound argument to compare prices of imported bulk urea arriving in vessels at ports with the cost of fully-bagged domestically manufactured material. The imported ones still needs to be discharged and bagged. The $ 368-388 per tonne domestic cost includes bagging expenses.
• The new urea plants proposed by the government are mostly in the northern and eastern hinterland. The differential cost of moving urea to Bihar or Purvanchal from any port would be Rs 500-600, which is another $ 7-9 per tonne. That further narrows the make-versus-buy gap to $ 55-75 per tonne.
• Domestic productions are also subjected to other deductions such as delayed subsidy payments to domestic manufacturers (not possible in imports, where the entire cost has to be met upfront) and taxes paid on imported equipment, erection charges and services during construction stage — that would keep the gap well within a $ 40-50 per tonne range.
• India is planning to build LNG terminals and pipelines crisscrossing much of the country. Hence it is going to become increasingly easier to import and transport gas than urea to the hinterland.

Way Forward

India can evolve a mix and match model of making and buying urea. The urea imports would make sense mainly for meeting the needs of the western and southern markets. But for North and East India, which is where the next Green Revolution should be, there is a strong case for having sufficient domestic manufacturing capacity.

Urea plants at Bhatinda, Nangal and Panipat served the cause of farmers in Punjab and Haryana during the seventies. The same logic can be extended to the upcoming facilities supplying to East UP, Bihar, Jharkhand, West Bengal and Odisha.

Hence instead of aiming for 100% self-sufficiency, a sounder long-term strategy for urea would be to “make” more in Northern and Eastern India, while exploring greater “buy” options for Peninsular India alongside closing down some of the older energy-inefficient units.