NIP 2026 promises investors in new urea plants a minimum return on equity of 12-16 per cent | Photo Credit: NAGARA GOPAL

When geopolitical instability sets in, India often faces disruption not just to its energy supplies but also to food, because of its high import dependence for fertilizers. This explains why successive governments have devised incentive schemes to promote domestic urea production, despite patchy results. The New Investment Policy in 2014 created fresh urea capacity of about 7.6 million tonnes — yet a 10 million tonne deficit remains. The National Investment Policy 2026 (NIP 2026) announced recently aims to bridge this gap.

This policy targets eight to nine new gas-based plants, and tries to incentivise urea production by addressing the shortcomings of the earlier scheme. However, it is moot if the private sector will take the bait. Urea remains one of the most complex industries to operate in, with regulatory controls dictating every aspect of operations from feedstock sourcing to branding to distribution and pricing. The primary challenge for any enterprise looking to set up a new urea plant is the fixed selling price of urea, which at about ₹5400/tonne, is less than a tenth of the production costs. Therefore, viability of operations is decided by the extent to which subsidies bridge this deficit. Here, NIP 2026’s design appears superior to the previous scheme.

It promises investors in new urea plants a minimum return on equity of 12-16 per cent. Under the earlier scheme, subsidy was pegged to the import parity price of urea, with a floor of $305 and a ceiling of $335 per tonne — with escalations allowed for spikes in global gas prices. This approach made no provision for escalations in fixed project costs or rupee depreciation. NIP 2026 however, factors in both fixed and variable costs of production for calculating the assured return on equity. It also promises to protect producers from exchange rate swings while they build new capacity, by offering rupee reimbursement of foreign exchange costs at the end of the first four years. Allowing return on equity within a range of 12-16 per cent can help accommodate overshoots due to inflation, interest rates or currency risks.

NIP 2026 is not without its shortcomings. Allowing pass-through of virtually all costs, with guaranteed returns, is not a great idea. It provides no incentive for a unit to lower costs or improve efficiency. We have been through this before. The Retention Pricing Scheme that ran between 1977 and 2003 before it was shelved encouraged gold-plating of capacities, leading to spiralling production costs. While NIP 2026 may address the import dependence on urea, Indian producers will still remain import dependent for natural gas to power their plants. The Centre cannot do much, except to diversify feedstock sources. The many flip-flops on urea policy over the years have made private industry wary of undertaking any new projects; public sector units now dominate capacity. Deep-rooted reforms in urea pricing and distribution are needed to woo private players back.

Published on July 21, 2026