Citizens' Issues
Urea shortage and the need to build capacity in home or abroad

The fertilizer industry is at cross roads, particularly due to inadequate supply of gas and the shortages in urea. The latest move by the Government withdrawing its guarantee to ‘buy-back’ entire production of the new units has become the fly in the ointment

In response to the government's initiative notified in January this year under the new investment policy, fifteen applicants came forward to participate, either by expansion of the existing units or putting up new greenfield units to set up urea plants to meet the national demand.

 

The present production of 22 million tonnes (MT), against the annual estimated need of 29 MT, necessitates importing 7-8MT. The Department of Fertilizer, which anticipated four or five applications for new investment proposals, is overwhelmed by this response from 15 companies - purely because of the guaranteed buyback assurance given by the government.

 

The existing subsidy doled out by the government, as a sequel to protecting the farmer, has reached staggering proportions. The sliding rupee will make it even higher, since re-gasified liquefied natural gas-LNG (based on imported gas) will cost $20 a unit (million metric British thermal units-mmBtu). This will take indigenously produced urea to $550 per tonne as against $310 for imported urea.  I have deliberately kept out the rupee conversion component here.

 

The estimated demand for urea by 2017 is projected at 34MT, while the installed indigenous capacity will remain at 22MT, leaving a shortfall of 12MT, if no new plants come up or no expansion takes place. If all the 15 applicants are given a go-ahead but asked not to depend upon supply of domestic gas or a buy-back, chances are, many will automatically withdraw from the scene.

 

However, if four or five applicants are given the green signal, with an estimated capacity of 1.3 to 1.5MT per unit, we would still struggle to reach 27-28MT and would still fall short of our projected requirement.  Hence, it would be good if the Department of Fertilizer considers licensing at least eight units, and, at the same time, look at the overseas markets for plant and expansions.

 

Ten days ago, the government restored fertilizer price controls, effectively through backdoor, seeking manufacturing units to fix reasonable maximum retail price-MRP, except for urea. Secondly, the government has now withdrawn the buy-back guarantee for the new capacities (it does not matter if these are brownfield or greenfield units). It remains to be seen, how many of the 15 applicants plan to actually proceed to obtain the licence.

 

In the meantime, Zuari Industries, which had signed a Memorandum of Understanding (MoU) with the Karnataka government in 2010 to set up a urea plant near Belgaum, has shelved its Rs5,000 crore project due to land acquisition issues.

 

The situation, as we see it now, is grim.  For the next few years, continued dependence on imported urea is inescapable, assuming that even the government expeditiously handled the licensing part.  This, in our opinion, should be the first step.

 

The second step, which we had proposed, is to directly approach the Qatar government for a joint venture facility to be set up in their country.  This will eliminate the worries on gas supplies and environmental issues will not be subject to inordinate delays, which we experience in India.

 

Simultaneously, the next step should be to open discussions with the Myanmar government to set up a TWIN urea plant in their country. We shall revert on this a little later in the story.

 

It may be recalled that India's GAIL was one of the sub-contractors, in a six-company consortium that laid a 800km long gas pipe line to transport 12 billion cubic metres annually from Kyaukpu to Ruili in Yunan province in China. Thus, natural gas from Myanmar will be going all the way to China, while India has been unsuccessful to get a piece of the action!

 

According to the present estimates, Myanmar holds 7.8 trillion cubic feet (tcf) of gas. The government is in the process of calling for bids to cover some 18 shore blocks.  In effect, Myanmar is a virgin territory where proper exploration with western technology has not taken place so far. They need investment and expertise, both of which, India can afford to give.

 

Also, the Myanmar government has shown interest in using its natural resources to the benefit of its 60 million people.  This is why we suggest that enterprising Indian companies, such as Tata Chemicals must explore joint venture possibilities. The idea of twin urea plant comes from this concept!

 

India's trade balance with Myanmar is only $2 billion. But here is a neighbour who has many close cultural, historical and even religious relations with India, which, in the recent past have been neglected due to political mismatches.

 

It is time India took greater interest in improving its trade relations with Myanmar and offered to set up urea plants there on a turn-key basis. This would firmly establish our credentials.

 

We must remember that China is already getting gas from Myanmar!

 

You may also want to read…

How to reduce the demand-supply gap in urea

 

Urea subsidy: Why not set up joint venture plants in the Gulf?

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

User

COMMENTS

Sanjay Jain

3 years ago

There is ample Urea capacity available in the world and there exists robust trade in them. With 21 mt capacity and another 2mt assrued of OMIFCO, India remains secured with almost 80% of its consumption. Self Sufficiency argument is fallacious in urea manufacture as 80% of urea cost is gas, which is imported. One must not also forget that in case Urea was to become part of NBS and the farmgate prices are freed the lopsided demand in its favor could get corrected, in which case there may actually be some correction in actual demand for urea.

RBI imposes Rs5.6 lakh fine on SBI for violating currency chest norms

SBI is fined for deficiencies and lapses in the operation and maintenance of the currency chest at its Secunderabad branch

The Reserve Bank of India (RBI) on Wednesday said it imposed a fine of about Rs5.6 lakh on State Bank of India (SBI), the country’s largest lender, for violation of currency chest norms.

 

In a statement, the central bank said, "The Reserve Bank has imposed a penalty of Rs5.63 lakh on 12 July 2013 on SBI for violation of the terms of agreement with RBI for opening and maintaining currency chests".

 

The penalty was levied in connection with deficiencies and lapses in the operation and maintenance of the currency chest at the Secunderabad branch of the state-run lender, it said.

 

Last month, RBI had imposed a penalty of Rs3 crore on SBI for violating know your customer (KYC) and anti-money laundering norms.

 

The penal action by RBI was taken after Cobrapost alleged violation of KYC norms and money laundering by banks and financial institutions.

 

"After considering the facts of each case...Reserve Bank came to conclusion that some of the violations were substantiated and warranted imposition of monetary penalty...," RBI had said at that time.

 

Cobrapost had alleged that the financial sector entities had offered to open bank accounts and lockers for customers without following KYC norms, convert their black money into white and obtain fictitious PAN cards.

 

Those named in the expose include SBI, LIC, Punjab National Bank, Bank of Baroda, Canara Bank, Reliance Life, Tata AIA, Yes Bank, Indian Bank, Indian Overseas Bank, IDBI Bank, Oriental Bank of Commerce, Dena Bank, Corporation Bank, Allahabad Bank, Central Bank of India, Dhanlaxmi Bank, Federal Bank, DCB Bank and Birla Sun Life.

User

Why traditional Indian investor is not interested in equities and other products

Five business news channels, so many newspapers, magazines and websites would not be able motivate traditional Indian investor to invest in equity and other variable return products unless the investment climate in the country is not changed significantly

He is not worried about his investments beating inflation. He abhors equity and believes it to be a gamble. Mutual funds are a strict no-no for him. He believes that investments in physical assets are as important as financial assets. He chases bank deposits and believes that insurance in an investment and not just a risk covering instruments. Media’s attempt to change his mind set towards investments has hardly worked. He continues to be the same over generations. There are no prizes for guessing it right. Welcome to the world of the traditional Indian investor, the investor who has existed for ages and has been successful as well. He has contributed significantly to the economic growth by generating one of the highest savings in the world. The recent events in the financial markets have brought focus back to this kind of investor. The turmoil in the market has shifted focus back to the strategy of this investor.
 

Before moving ahead let us look at traditional Indian investor and his investments. Investors generally make investments in two kinds of assets- financial assets and physical assets. Financial assets are bank deposits, insurance and equity while physical assets are gold, real estate and some white goods used on a day-to-day basis. As per the data released by the Reserve Bank of India (RBI), investors in the country invested in financial assets as follows over years:
 


From this, it can be safely concluded that the majority of Indian investors are extremely conventional in approach and have no out of the box thinking. The investor has stuck to the same investments over a period of time. It is very obvious that bank deposits and insurance have been the most preferred investment option for the traditional investors. Shares and debentures are hardly preferred by the investors. The highest savings in shares has been around 7% which has fallen substantially now. The RBI data related to projection of savings  during 12th five year plan gives a bigger picture of how savings are going to be in financial and physical assets over a period of five years ( Refer: table below). It is clearly evident that bank deposits will continue to be as high as 50% of total savings. The share of insurance in total savings is also going to remain strong while that of shares and debentures will once again be consistently low.
 


What is the DNA of traditional Indian Investor?
 

Looking at the data and the nature of the financial savings made in India, the obvious question that comes to mind is why do Indian investors invest in traditional financial assets or to be more precise, ‘sarkari’ kind of assets? Why is bank deposit more important for this investor than investments in shares? Is the investor worried about volatility and is completely risk averse? The answers are both yes and no. Majority of Indian investors struggle to save because of low-income levels and hence do not want to risk their hard earned money, so they invest in traditional investment assets. It is not about financial education. In India five business news channels, so many newspapers and magazines and websites keep on bombarding investors with need for investment in equities for consistent wealth creation but this has somehow not worked. Therefore, this category of investors is fairly aware about investment options. The traditional Indian investor in keen on preserving his wealth as the ability to take risk is limited.
 

There is another group of investors, which is affluent and can take risk, but has learnt over a period of time that investment in variable investment products can be rewarding but also killing many times. This investor has been investing in the equity market but gradually, he seems to be disillusioned. The bitter experience over a period has made this investor realize that it is better to keep away from equity. The proof of the pudding is in the eating and you cannot convince an investor to invest for long term, if the returns are not good.
 

The traditional Indian investor is a very intelligent breed and knows his interest very well. The famous saying that ‘a bird in hand is worth two in the bush’ drives him. Is he doing harm to himself by not investing in equity and other variable return products? The answer is no, as long as he is meeting his financial goals. In the current market turmoil, he is sitting pretty and is not worried about what next.
 

Is the traditional Indian investor good for Indian economy? 
 

While some may argue that the traditional Indian investor is doing harm to himself, by not investing in risky, but potentially rewarding products, the fact remains that he is a boon to the Indian economy. He is a cheap source of capital and helps the economy channelize necessary savings for future investments. The deposits made by him help utilize the resources for investments in the economy. Debt is a comparatively cheaper source of capital compared to equity, and investors in India have contributed to this in a significant way, by making investments in debt products. The physical savings made by these investors sometimes become unproductive and needs to get channelized for more productive usage.
 

Is the investment profile going to undergo changes in India in the days to come? It is difficult to answer this but the fact remains that investors cannot be motivated to invest in equity and other variable return products as long as the investment climate is not changed significantly. Volatility is a part of equity investment but manipulation needs to be controlled. Better corporate governance and confidence building measures can bring more investors into the fold. But it looks difficult in the near term. The ‘Traditional Indian investor’ is here to stay.

User

COMMENTS

subbu

3 years ago

Iam a financial advisor, people tend to ask for good return on their investment, I used to tell that if they want to invest for not less than five years, I suggested them mutual funds investing in equities. Now mutual funds gives negative returns, if they had invested before five years.So,they have to invest only in FDs only for better capital return.

anurag

3 years ago

The author is just another aam admi trying to prove he is not.
Let me put some factual arguments why stock market does not find any takers in India

1) Corporate Governance and Lack of faith in companies:
Most of the 7000 stocks trading in India do not have proper accounting practice and they bump up some of the numbers.

2)Dearth of quality:

Nearly all the companies offer commodotised products and services which can be easily replicated. Investors need to approach Bottom-top thematic approach.

3) Manipulation and speculations:

It is no secret that practices like circular trading and black money of 1 trillion dollar are making their way onto trading. Gullible investors lose their money and prefer FD ,real estate and Gold

4) Aam Admi never made any money in stock market as the market made strides from 4000 to 21000 just in 4 years of 2003-07. Rest of the period , stock market absolutely gave no returns for long investors in NIFTY.

5) Most of the money made in market in India requies use of derivative and intra day/short term technical charts which are used by few specialised traders and common people cannot do it

6) Mutual funds do offer real potential to common people but they are very selective and requires again lot of due deligence

Panna Thakkar

3 years ago

To make the Tradational Investor to even think or dream of to come to the equity cult. The Govt, Stock brokers etc should work hard to be transparent.
There is curroption everywhere there is cheating everywhere stocks lying in demat a/cs are used by brokers.
Why then the tradational investor ever think beyond this safe comfort zone?

REPLY

Gautam Haldipur

In Reply to Panna Thakkar 3 years ago

If as you say there is cheating in totality, the system ought to have collapsed long ago. The fact is it has not & the reason being it is vibrant, dynamic & reasonably strong. If you check your Demat A/c regularly & your Instruction stationery is with you, then you can opt to sue your DP & seek fair compensation. It is possible that it cud have happened, but the thought is honestly far fetched.

I am glad to see you ask why beyond the Comfort Zone? Here is the answer:
Comfort Zone, not just in investing but in every aspect of our life tends to bring in complacency & that is what is the beginning of a downfall.
If people understand & can perceive the future with Interest Rate Risk, Systemic Risk & several other associated factors, they will automatically venture to think beyond the Comfort Zone

Gautam Haldipur

3 years ago

Dr.Gautam Haldipur, Hubli, Karnataka

Very interesting article indeed. Having invested & worked with different financial products across the spectrum, I would like to make the following observations:-
1. The traditional Indian Investor largely looks for GUARANTEED RETURN PRODUCTS.
2. As it stands today he is in a COMFORT ZONE which he obviously does not want to transgress.
3. The tendency/willingness to take calculated risk is missing which becomes Crystal Clear from the Excel Charts above.
4. His pristine love is for F.D.'s, Real Estate & Gold.
5. Going forward as we integrate with the Global Economy (which I think is irreversible now)the traditional Fulcrum of Investment thinking is slowly but surely going to crumble; what with Deposit rates going down, Inflation perking up & the purchasing power of people going down. Real estate is artificially overvalued without justification & could burst sooner or later. Though Gold is likely to go up, its returns parameters are going to be subdued.
6. The earlier the Investor comes to terms with this reality the better. This truth needs to be taken to him with proper qualified advisory. There is no reason why his mind set cannot change, the percentage though may not be great. With proper Risk Profiling done it is possible.

REPLY

Vinayak Bhimarao Mudholkar

In Reply to Gautam Haldipur 3 years ago

Sir,
I am also invested in equities....I do love to take calculated risk; but your calculations go totally wrong when there are frauds &/or mis-goverance....Tell me few names of brokers who don't mis-use the POA....There is no basic safty !!!....India is full of frauds.

Gautam Haldipur

In Reply to Vinayak Bhimarao Mudholkar 3 years ago

With utmost regards to Shri Vinayak Mudholkar, may I request that I be read correctly:-
1.Calculated risk is a relative term. If you like to believe your broker with implicit unquestioned faith, then yes this definition changes. A POA would obviously be given in a PMS & yes it is open to abuse. There are other ways we can deal with this.
2.Study the subject thoroughly & build your stock valuation parameters based on your individual risk profile; most likely you may not go wrong save for for a few blips here & there. You cannot be 100% right all the time. The learning curve in this never ends; it is an ongoing process. After 38 years of investing, yes! I am still learning a lot more of new things. Well! it has taken me close to 20 years to imbibe the art of investing with care.
3. Put in simple terms if you can manage a 25% post tax return on your investment, that will be a great deal.
4.As far as the name of a broker is concerned:- My personal experience with HDFC Securities Ltd.has been fairly good.This online platform is user friendly, fairly good & exhaustive. Most of all its security features are good.However it is marginally more expensive compared to your regular brokers.Good things rarely come cheap.As a Investment Planner I have recommended this to my Client Friends. Believe me, I am yet to hear any of them complain any wrong doing there.As a friend, may I suggest you try this?
5.Last but not the least, please do not despair. There are good things that coexist with the bad things. Things are far better than they were about 20 years ago. To say that I have not had problems would be unfair. I continue to have my share of problems. The only way out is to fight your way out methodically & that is what I precisely do!

Vinayak Bhimarao Mudholkar

In Reply to Gautam Haldipur 3 years ago

Thank you for the explanation & suggestions....Once again thanks.

Panna Thakkar

In Reply to Vinayak Bhimarao Mudholkar 3 years ago

Yes The brokers have misused Power of attorney and have used shares lying in demat a/c .
Where is the saftey ? Why people will come to stock market.
All big names are involved in this thing.
Everywhere there is fraud cheating and lootmaar.
and Govt. is silent because these brokers are funding them

VGANESAN

3 years ago

i AM AGREEING WITH YOU.At the same time i like to mention the indian investor is willing to take and accept political risk currency risk country risk natural calamity like flood and drought and business risk all this put together 95 percent. But in india the 95 percent risk is from manipulation and speculation and
above mentioned risks are only 5 percent.How one expect our savers to put money in equity

REPLY

Nilesh KAMERKAR

In Reply to VGANESAN 3 years ago

1) As employees, we are willing to risk our career and future on someone else's enterprise.

2) As customer's will are willing to consume products and services offered by these businesses

3) We will just stand and see foreigners own significant chunks of our businesses.

4) We will also see foreigners set up their business operations in our own country. And some of us will risk our careers there.

5) We will spend our entire lives in India as proud Indians.

6) We will also boast of India's progress & prosperity over the past six decades.

But when it comes to profit from India's growth we start imagining call sorts of excuses. We become the biggest prophets of doom and gloom.

Invest in Indian Businesses and profit from India's growth. India will continue to grow. Have faith.




Vinayak Bhimarao Mudholkar

3 years ago

If I am not wrong, during 2001 - 2003 bear market F & O was just introduced so there was a time correction as against a sharp price correction during 2012-2013. According to me during the next bull run the same F&O will lead to sharp price appreciation irrespective of fundamentals.....If you want to become wealthy grab the untouchables!!!....fundamentally sound but highly priced stocks won't make you wealthy.

REPLY

Vinay

In Reply to Vinayak Bhimarao Mudholkar 3 years ago

That's a pretty nasty suggestion.
Would you buy a hotel that serves rotten food and should be closed down any time soon?

Why would you recommend people to compromise on fundamentals?

Shit like this is why people lose money. They think anything and everything will go up and keep buying until everything crumbles.

Vinayak Bhimarao Mudholkar

In Reply to Vinay 3 years ago

I must explain what I mean by "untouchables". During the last bear market there were stocks like Pennar Industries, Diamines & chemicals. The Book Value of both stocks was negative for few years; so they got butchered but when they recovered; they became multibaggers....The eps growth of HUL from 2000 to 2012 is just 5%; but the P/E & P/B ratio is very high. When the tide turns the distressed equities outperform. That is why Tata Capital & Icici Ventures set up a distressed equities fund & expect 25% return!!!....I am not to say each & every distressed co. will turnaround....Do you know - Filelity Liveraged Equities Fund?....It is one of the successful of its kind.(S&P was beaten by it with a 17% average return)

hasmukh

3 years ago

Very good Article to show that Investors are now (in last few years), shying away from Equities.
I am investing in shares since last about 40 years and was quite satisfied (except during last 5/6 years or more). I am investing in IPOs, Rights and buying from market. But am a big looser from my fresh investments made in last few years. Reason? To me (i) Excessive speculation and manipulation. It appears all these F & O s have made very big damage and same must be stopped immediately (ii) Cunning Issue Managers & Advisors, who advise Cos. to price IPOs/Rights aggressively (and selling with Big Advertisements), leaving the investors to only cry. I will be interested to know experience and views of other Investors too.

Pantulu

3 years ago

Right now common people have no interest because it is only speculators who are reaping benefits at the cost of gullible people. The share prices do not reflect the companies performance with only a couple of exceptions. There is a need to link the share prices with performance parameters so that ordinary people will know where to invest.If the market is left in the hands of speculators no improvement is possible.

REPLY

Vinayak Bhimarao Mudholkar

In Reply to Pantulu 3 years ago

"To link the share prices with performance parameters" is the best idea!....no doubt!....but we are to live in the world which we don't like.

Nilesh KAMERKAR

In Reply to Pantulu 3 years ago

While investing in stocks, being gullible is a major handicap. Sceptics tend to survive and prosper; to be sceptical is a necessary precondition for becoming a better investor.

Vinayak Bhimarao Mudholkar

3 years ago

If you look at the eps growth of HUL (one of the most defencives)since 2000 to 2012 it is roughly 5%(cagr) which is equal to the average after tax returns from bank F. D.(if you are in the 30% tax bracket.) If you want anything beyond that try to withstand volatility!....Though ideally speculation is untouchable; in practice it is not so!!!

Nilesh KAMERKAR

3 years ago

Investing in market linked investment products is a matter of individual interest. But before everything else it is an act of faith. If done correctly it yields disproportionately higher rewards. Contrary to popular beliefs, investing like any other profession calls for putting in lot of hard work & continuous learning. – While most people would love to have superior returns, not many are keen to work towards it.

REPLY

Vinayak Bhimarao Mudholkar

In Reply to Nilesh KAMERKAR 3 years ago

Sir,....I always appreciate your views....In addition to hard work & continuous learning one needs lot of courage because stocks with good fundamentals & relative strength crashed by 50-60% from their respective 52 week high(eg. Yes Bank, Dena Bank)

Nilesh KAMERKAR

In Reply to Vinayak Bhimarao Mudholkar 3 years ago

Agree. As Benjamin Graham said

"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it - even though others may hesitate or differ."

pravsemilo

3 years ago

I beg to differ. I think the averseness to equity is also due to financial education. It has been embossed into our minds that equities are risky.

In the circle of people that I know, there is hardly anyone who invests in equities and is even aware of mutual funds. I have trouble explaining the concept of SIP to them. The generation above me never invested in equities and so didn't I in the early part of my career. Those who did coax me to invest in IPOs and do short term profit booking - don't bother about the short term capital gain. My colleagues have bought homes and invested their savings in it. In fact, you get criticized for taking a term plan.

I do agree that Indian savers give importance to safety, but they are not aware of financial and economic jargon like inflation, asset allocation etc.

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