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 Secondly, the government has now withdrawn the buy-back guarantee for the new capacities (it does not matter if these are brownfield or greenfield units).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!
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(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.)
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.
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.