Urea Subsidy and Retention Policy

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*Retention Price Cum Subsidy On Urea*


1. The sale prices of controlled fertilizers are fixed by the Government
of India (Department of Agriculture & Cooperation) under the Fertilizer
(Control) Order, 1985(FCO), issued under the Essential Commodities Act,
1955. FCO provides that the Central Government may, with a view to
regulating equitable distribution of fertilizers and making fertilizers
available at fair prices, by notification in the official gazette, fix
the maximum prices at which any fertilizer may be sold by a dealer,
manufacturer etc. At present, only urea is covered under the statutory
price control under these provisions. While the phospahtic and potassic
fertilizers were taken out of purview of RPS w.e.f 25.8.1992, the low
analysis fertilizers viz., ammonium chloride, ammonium sulphate and
calcium ammonium nitrate were decontrolled w.e.f 10.6.1994. From
1.4.2003, RPS will be dismantled and subsidy payments to urea units from
1.4.2003 would be regulated in terms of the new pricing scheme for urea
units, which has already been communicated to all urea units on

2. The prices notified by the Central Government from time to time have
been much lower than the cost of production. In order to compensate the
manufacturers for lower realisation in the form of statutorily notified
sale prices as compared to their retention prices (normative cost of
production plus 12% post tax return on net-worth) fixed by the
Government, the difference between the retention price of the individual
units and their net realisation through their sale price is paid as
subsidy by the Central Government to the individual urea manufacturing
units under the Retention Price-cum-Subsidy Scheme (RPS) introduced in
November,1977 vide Resolution dated 1.11.1977.* *The cost of production
of various fertilizer units differ from unit to unit and even from month
to month, depending upon the health and vintage of the plant, the
feedstock used, the levels of capacity utilisation, energy consumption,
distance from the source of feedstock / raw materials, cost of inputs

3. In addition to the retention price subsidy, *equated freight subsidy*
is paid to the manufacturers of controlled fertilizers to cover the cost
of transportation from the production plants to the consumption centres.

4. Since the consumer prices of both indigenous and imported urea are
fixed uniformly, *subsidy is also paid on imported urea* in order to
bridge the difference between the cost of imports and statutorily fixed
consumer price.

5. The RPS provides for fixation of retention price of individual units
on per tonne basis, after taking into account the normative capacity
utilisation prescribed under the scheme of the Government and a
combination of norms and actuals in respect of the various cost elements
and expenses.   Pre-tax return on net-worth corresponding to post tax
return of 12% is given as part of the retention price after covering
various elements of cost.

6. The *various cost elements *taken into account for fixation of
retention price of individual unit fall under the following three broad

(A) Variable Cost:                 Comprises of   the cost of raw
materials and    utilities.

(B) Conversion Cost:            Comprises of salaries and wages, repairs
and maintenance, selling expenses and other overheads.

(C) Capital Related Charges:          Comprises of depreciation,
interest on loans and 12% post tax return on net-worth. (Networth =
equity + free reserves)

7. During the currency of a given pricing period of three years,
escalations / de-escalations are provided to reflect variations in the
prices of major inputs. Escalations are also provided in respect of
certain other items of cost (viz. Salaries and wages, chemicals and
consumables, repairs and maintenance, overheads etc.) where there is a
significant variation during the currency of the pricing period due to
unavoidable factors.

for more details about RPS Click here <retentation_price_on_urea.asp>

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