Government to review fixed costs for urea plants, subsidy payouts may change

The government is establishing a sub-committee to review the fixed-cost component used to calculate payments to domestic urea producers, according to people aware of the matter. This move could affect how much manufacturers receive and, consequently, how much the government spends on urea subsidies. Fixed costs include expenses incurred by a plant irrespective of production levels, such as wages, maintenance and other overheads, which form part of the subsidy payout by the government.

The currently used fixed-cost formula for urea plants was determined in 2002-03, with the government providing additional compensation in 2014. The government sells urea to farmers at a regulated price, while manufacturers are compensated under the fertiliser subsidy framework, which includes both fixed costs and variable costs like gas prices. According to industry representatives, the cost of production has risen significantly in recent years while the urea selling price has remained unchanged, and the industry has made several representations to the government regarding this disparity.

The sub-committee was established after an earlier review by the Chief Adviser Cost suggested that the fixed cost payout could decline for several of India's 27 urea manufacturing units, a finding opposed by the industry. The proposed sub-committee will undertake a fresh assessment using cost data for 2022-23, 2023-24 and 2024-25, working to strike a balance between keeping urea affordable for farmers and limiting government expenditure on fertiliser subsidies.