This study covers only the subsidy on urea, the dominant nitrogenous fertiliser which is distributed under government control. There is a different scheme for subsidising indigenous phosphatic and complex fertilisers, which are sold in the market freely. It is chaired by the Secretary of the Fertilisers Department, and has representatives of other related government departments and the fertiliser industry as members. The per-tonne retention price of urea is fixed by the FICC separately for each plant, on the basis that it should cover the entire cost of production and also provide a 12 per cent return on net worth after tax. The cost of production includes all operational and overhead costs, interest on borrowed funds, and depreciation of capital assets.
Net worth is defined as equity plus reserves.
Please note these points carefully, and look out for some revelations. There are government-notified rules which require every fertiliser factory to maintain proper record of costs. But the FICC never bothered to check such records for accuracy, and never independently verified the reasonableness of the expenditure. It invariably accepted the cost data furnished by the producers, certified only by chartered accountants of their own choice and employed by them. It provided no incentive for efficient and cost-effective operations, and could encourage extravagance and even severe distortions.