India has unveiled a new policy framework to bring in new investment in the domestic urea manufacturing industry and address one of the biggest hurdles faced by mega-infrastructure projects- foreign exchange risk. The National Investment Policy for Urea-2026 (NIPU-2026) is likely to offer investors more financial transparency and boost gas-based urea manufacturing capacity.
This move follows as India looks to cut its reliance on imports of the fertiliser. A range of external factors have increased the uncertainty of fertiliser imports – from global commodity prices and currency swings to energy costs and global instability – and new indigenous production aims to boost India’s fertiliser resilience.
– Currency risk, is one of the largest concerns for urea projects.
Urea manufacturing units typically require high capital investment. A new plant requires buying of plant, equipment, technology and engineering services, most of which may be imported.
Often, they are associated with foreign currencies, notably the US dollar.. So, by consequence, a large variations in the exchange rate can influence overall project costs.
For instance, depreciation of rupees during the construction or operational phase of a project can increase the rupee value of imported equipment and foreign currency linked expenditure.
The problem is getting more complex in the case of fertilizers, for example, as urea prices and subsidy systems are strongly correlated to government policy. Fertilizer companies are not able to transmit higher prices to their buyers. Consequently, increased exchange rate fluctuations implied more pressure on investors.
NIPU-2026 aims to overcome this difficulty by offering a more transparent system of absorbing fixed cost-es and reacting to fluctuation-(s) in the exchange rate.
Four-year schedule to convert fixed costs
The time action is also a significant aspect of this policy. For example the Rupees equivalent of fixed costs at the end of four years are as below,
Move to cost structure with a stronger emphasis on predictability for long-term projects. In this approach, known foreign exchange assumptions are not maintained unchanged over many years. The influences of movements in the exchange rate can be included in the policy.
For investors, this can lead to potential improvements in the transparency of project economics. It can also lead to a reduction in the uncertainty surrounding the financial performance of newly built urea production plants.
This type of move is especially significant for projects with multi-year durations. Over this period, exchange rates can fluctuate due to inflation, interest rates and international capital flows.
New capacity can save us from depending on imports
The Government anticipates that the new policy regime will facilitate addition of about 10 million tonnes of per annum capacity of urea by way of green field investments.
India is one of the biggest consumers of fertilizers in the world of which, urea is one of the most used fertilizers by farmers. While the domestic production has risen substantially, the country continues to have to import some of its requirement.
The reliance on imports leaves India vulnerable to a range of risks. International urea prices may spike if energy prices change, supply shortages or geopolitical factors come into play. The falling rupee can also inflate import prices.
An increase in domestic production can serve as an insurance against these problems. Although India may still need to import fertilisers, a higher domestic capacity might insulate the country against fluctuations in world prices.
An RQE framework provides clarity for investors
Another key feature of NIPU-2026 is the return on equity framework. Number U fraPRAKkAUUAAWPåA( policy makes a provision for a return on equity ranging from a minimum of 12% to a maximum of 16%.
This is interesting because producing urea in a controlled and monitored system. For example, unlike a business that can change pricing simply based on what the market is doing, fertiliser producers do not.
Hence, clarity on what a large capital intensive project can generate as returns is essential for the investor. The return on equity band is likely to be optimal if it is able to bring in private investment and make sure returns are within a desirable band.
The government has also indicated that under the new framework, the revised estimate of savings from different plants would be more than 250 crore in each project compared to the projects sanctioned under the earlier policy framework..
Clear separation of fixed and variable costs.
NIPU-2026 also emphasizes on delineating fixed costs and variable costs. This aspect can add clarity to the costing structure of urea projects.
Typically, the Fixed costs include capital expenditure related costs, depreciation and other associated expenses or costs and Variable costs are contingent upon factors like price of natural gas, energy consumption and other operating costs on daily basis.
Differentiating between these two groups is important as it enables the government to understand better the various component costs incurred in the production process and also serve as a useful reference for subsidy decisions to be made.
A transparent cost structure might be beneficial from the manufacturers’ perspective in terms of reducing regulatory uncertainty and allowing a more reliable long-term financial planning.
Why is gas-based urea production so important?
Natural gas, which is a crucial input to the process of urea production. Its cost determines the overall economics of the fertiliser manufacturing process.
Domestic fertiliser plant efficiency has been targeted by the government, along with an expansion of gas-based production. Current policy initiatives could set the stage for further investment in more efficient manufacturing plants.
But, natural gas price has been always a big constraint. Every rise in global energy prices can push up urea cost. For this reason, the government has to consider both energy risk and currency risk in the long-term investment policy preparation process.
Strengthening India’s fertiliser security
The overarching aim of this new urea policy is to address the needs of the Indian agricultural supply chain. Access to fertiliser is directly related to agricultural output and food security.
Any break in urea supplies, does harm farmers, especially during the sowing period. More resilient domestic production base can reduce global supply shocks risk.
Simultaneously, to a certain extent dependence on import can partly shield India from the influences of international price changes and depreciation of currency.
What lies ahead
The profitable implementation of NIPU-2026. The appreciation within the investor communities will be more closely related to the timely approvals, the assured natural gas and the high-degree, certain regulation and transparent pricing calculation.
Whether or not the government adopts a foreign exchange risk policy will probably continue to be an important consideration for investors assessing new projects. The four-year conversion period and return-on-equity policy could help reduce uncertainty for companies contemplating large investments in the industry.
Overall, the new urea policy is a positive move in contributing to strengthening the domestic fertiliser industry and combating dependence on international markets. It tackles currency risk, openness to new capacity and presents a clear picture of project returns.
In a world where variations in exchange rate, energy prices and geopolitical developments all have the ability to quickly change the costs of imported fertiliser, the growth of domestic urea production may be critical in delivering India’s long term fertiliser and farm security.
