India’s massive demand for natural gas is a result of its easy substitution of liquid fuels such as naphtha, fuel oil, diesel etc. India at present is producing less than 100 million standard cubic meter per day (MMSCMD) and another 50 MMSCMD is imported as liquefied natural gas (LNG) (Fertiliser Statistics, 2011-12, Fertiliser Association of India). As natural gas has competing demands from different sectors of the economy for adequate energy—being a clean fuel, requiring less investment and yielding a number of industrial products, it can easily record an additional usage of 100 MMSCMD or more in the near future. Thus, allocation and price have always been regulated by the Indian government.
There is no doubt that natural gas is the cleanest fuel with its lowest carbon content irrespective of where it is used. Fertiliser, however, uses gas as feedstock unlike power generation where it is burned as fuel. Used as fuel, the carbon in natural gas is converted into carbon dioxide and emitted. But in case of fertiliser (urea) production, both hydrogen and carbon are used, which reduces the emission of green house gas.
While the demand for natural gas has always exceeded the availability for last two decades, there were times when natural gas was flared as waste with no downstream users. At this stage government decided to use the natural gas for production of fertilisers mainly in the western region near the gas resources. Three large fertiliser plants came up in Gujarat and Assam during 1967-1969. The gas available offshore of Western coast including Bombay High (started in late 1970s) was again, first utilised for the making of fertilisers. Five urea plants were commissioned at Rashtriya Chemical and Fertilisers (RCF Thal) and Krishak Bharati Cooperative Limited (KRIBHCO, Hazira) in 1984-85. This helped to reduce flaring of natural gas.
In the 1980s, various expert groups and committees recommended that the best use of natural gas was in the making of fertilisers. Besides it is well understood that fertilisers being a vital input for agriculture its prices should remain affordable to the farmers. Cost of production of urea using domestic gas is, at present, about Rs 10000-12000 per mt and will be affordable to the farmers even without subsidy. The cost of production of urea is high due to use of imported gas and liquid fuels and the government is providing large amounts of subsidy to regulate the prices of fertilisers at levels which can encourage their use.
The Hazira-Vijaipur-Jagdishpur (HVJ) pipeline was planned in order to locate fertiliser plants in areas of consumption. The pipeline, commissioned in 1987, saw the simultaneous sanctioning of six fertiliser plants, three of which were commissioned in 1987-88 while the other three spilled over to the early 1990s. Later, however, with indiscriminate allocation of gas and availability being less than estimates, shortage ensued in the late 1990s. In addition, Oil and Natural Gas Corporation Limited’s (ONGC) gas production started declining and rationing amongst existing consumers resulted in further shortage for the fertiliser plants till imported LNG was made available in 2005. Some relief was also provided by gas from public-private joint venture projects. Also, allocation from Krishna-Godavari basin (KG-D6), supply of which started in March 2009, filled the shortfall. But with consequent drastic reduction in production from KG-D6 fields the shortage of domestic gas continues. In view of this, there are often arguments against giving first priority to the fertiliser sector in the allocation of gas.
It is argued that fertilisers can be imported but power cannot. A few facts can clarify the position. India is the second largest consumer of fertilisers in the world, next to China. About 59 mt fertiliser products were used in 2011-12. Of this only about 16 mt were produced in the country using indigenous raw materials—domestic natural gas and indigenous rock. The balance, either raw material or finished products was imported. Imported raw materials include rock phosphate, sulphur, phosphoric acid, ammonia and LNG, while finished products include urea, diammonium phosphate (DAP), muriate of potash (MoP) and more. Thus India is heavily dependent on imports to the extent that almost 73 per cent of its requirement are met from outside. In such a situation, suppliers being few, India often finds itself facing cartelisation, pushing the procurement prices up further. It does not augur well for a country the size of India to have such a low level of self sufficiency, and it is definitely not desirable to increase our import dependence further.
Urea was the only product for which India had achieved self sufficiency in 2000-01. However today India imports 8 mt of urea out of its consumption of 30 mt in 2012-13 (Annual Review, 2012-13, Fertiliser Association of India). According to estimates available, fertiliser subsidy burden of the Indian government exceeded 1 lakh crore in 2012-13 (ibid.). Therefore, any increase in cost of fertiliser will increase the subsidy further and put extra burden on the exchequer. Alternatively, the prices will have to be raised which will affect the demand and consumption and in effect agricultural production.
Fertiliser plants are at present using a total of 46 MMSCMD of gas. Of this, domestic supply is 31 MMSCMD and balance is imported LNG. It is expected that shortage will increase due to dwindling supply of gas from existing fields of ONGC and KG-D6. Five fuel oil and one naphtha based plants have changed the feed from fuel oil and naphtha to natural gas in 2012-13 with combined investment of more than Rs 5000 crore under policy direction of the government. There is an immediate demand of additional 10-11 MMSCMD of gas in the industry to produce 23 mt of urea at full capacity.
The use of natural gas for production of fertilisers is justified for technical, economical and strategic reasons. If fertiliser production is allowed to fall from the present low level of self sufficiency, due to non availability of gas, fertiliser security and hence food security of the country will be compromised and no country of India’s size can maintain its sovereignty without its food security.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.