CHAMBAL FERTILISERS AND CHEMICALS LIMITED
ANNUAL REPORT 2005-2006
CHAIRMAN'S REPORT
Speech of Dr. K.K. Birla, Chairman delivered at the 21st Annual General
Meeting of the Company.
Dear Members,
I am happy to welcome you to the 21st Annual General Meeting of the
Company. This is an important occasion. I therefore propose to review the
performance of the Fertiliser Industry and the wider environment in which
the industry operates.
In the general climate of accelerated economic growth, boosted by the
reforms process, the Fertiliser Industry is perhaps the only major segment
which has stagnated and its growth constrained by the slow implementation
of even declared policies. This world class industry, the third largest in
the world, which has contributed immensely in supporting the key sector of
our economy, namely Agriculture, has suffered due to the absence of along
term policy. While all other industries such as steel, cement and IT are
forging ahead, the Fertiliser Industry has stagnated. This has not only
denied the industry its rightful place in the industrial map of the country
but may also potentially impact adversely the food security of the country.
The problems faced by the Fertiliser Industry stem from the larger issues
that affect India's agriculture, which itself is a victim of uncertain
policies and poor implementation.
ECONOMIC SCENARIO
India's economy has achieved spectacular growth since 1991 after nearly
four decades of restrictive economic policies. Economic liberalisation has
breathed a new life into most sectors of the Indian economy, excepting the
agricultural sector which is very unfortunate. In the agricultural sector,
instead of moving forward, the growth rates have in fact plummeted in
comparison with its historical trends. The economy as a whole is forging
ahead at the rate of over seven per cent per annum. Whereas the growth rate
in agriculture has declined. The average annual growth rate of this sector
declined to 2.1% in the Ninth Plan period (1997-2002) from the growth rate
of 4.7% in the previous plan period. Against the targeted growth rate of 4%
in the Tenth Plan (2002-2007), the performance hitherto has been
disappointing. According to economists, to sustain an overall growth rate
of eight per cent, agriculture must grow by at least four per cent. The
main reason for the sluggish growth of the farm sector is the neglect of
this sector in the planning and implementation of economic reforms.
Increase in agricultural production and productivity is essential for the
country's overall economic health. The Prime Minister has, therefore,
correctly underscored the imperative of sustained and faster growth of the
agricultural sector in order to eradicate poverty, to create more jobs and
to ensure food security. Our planners have recognised the potential of
agriculture to successfully combat poverty, raise rural incomes and provide
the platform for a sustained higher rate of economic growth. Our policy
makers have diagnosed that to rejuvenate the agricultural sector, the
country needs, apart from vastly improved infrastructure and superior
technology, several economic and structural reforms. Pursuant to this need,
the Government of India constituted in 2004 a 'National Commission on
Farmers' under the Chairmanship of the eminent agricultural scientist Prof.
M S Swaminathan. The Commission has submitted 4 reports to the Government.
We look forward to an effective implementation of the agreed
recommendations of the Commission.
INDUSTRY AND AGRICULTURE
Whereas rapid industrialisation is essential in a developing country like
India to create employment and generate wealth, agriculture plays a very
important role as over 70% of our population lives in villages. Agriculture
and industry are actually complimentary. Unless the economic condition of
the farmers improves, consumer demand cannot grow, which will hit
production, and lead to unemployment. It is a well recognised fact that in
any year when agriculture is affected by, say, drought or heavy floods, the
economy does suffer. Hence Prof. M S Swaminathan has correctly
characterised farming as our biggest private enterprise. This self-
propelled, self-driven, self-managed industry provides a living to over 700
million people-a performance unrivalled in the economic history of the
world. Indeed, it is the largest work force in a single sector of any
country's economy.
China is a good example of the role of agriculture in a growing economy. In
China, like India, a vast majority of people work in the rural sector and
depend on agriculture for their livelihood. Under the circumstances, apart
from focusing on building a strong industrial base, China has sought to
maintain a high rate of growth in agriculture. For over twenty five years
(1979-2004), the agricultural growth rate in China has been averaging 4.5%
per annum. This clearly demonstrates that a multidimensional focus is
required for overall economic development.
Apart from ensuring greater social equity as mentioned above, agriculture
can play a significant role in stepping up the growth rate of the economy
by endowing the rural population with much needed purchasing power. It is
estimated that a small incremental growth of 3 per cent in agriculture can
lead to 2.5 per cent growth in the industrial sector and a proportionate
growth in the GDP, Thus, if agriculture is strengthened, it will have a
synergistic effect on the Indian economy.
A classic example of how agriculture can drive the economic growth of a
country is provided by the economic history of the USA. The USA's current
economic strength was built on the foundation of its success in agriculture
in the 19th and 20th centuries. The industrial and technological take-off
of that country was possible owing to its massive agricultural prowess.
Indeed, the initial impetus to industrial growth was provided by the
surpluses generated in the farm sector.
AGRICULTURE AND FERTILISER INDUSTRY
The Fertiliser Industry enjoys a unique position among the industries of
our country. On the one hand, it provides employment (direct and indirect)
and adds to the country's economy and affluence; on the other, it renders a
great service to farmers by supplying them all the soil and crop specific
nutrients. Thus the Fertiliser Industry of India has played a significant
role in the economy of the country. It has an aggregate capacity of 18
million tonnes of nutrients dispersed across all the geographical zones of
the country. These units, with diversified ownership patterns, were set up
with an outlay of approximately Rs. 26,000 crore. This industry employs,
directly and indirectly, tens of thousands of people. On its payroll, it
has a large number of technologists, engineers, managers and skilled people
who man the industry's comprehensive operations. Together with steel,
petroleum, cement and power, it forms the bulwark of India's economic
strength.
The need to build a strong Fertiliser Industry stemmed from the Government
policy of achieving self-sufficiency in food. The basic ingredients of the
national strategy for boosting food production were:
- Introduction of high yielding variety (HYV) seeds.
- Introduction of modern farm practices.
- Increased use of chemical nutrients.
- Increased irrigation facilities.
It was the implementation of this strategy that led to what has come to be
known as the Green Revolution. The Fertiliser Industry played no small part
in this historic success story of India's agriculture. Although the
fertiliser industry was almost non-existent before independence, it gained
tremendous momentum in the last three decades. Today, India has a number of
hi-tech plants, producing nitrogenous, complex and phosphatic fertilisers,
dotted all over the country. The overall performance of Indian Fertiliser
Plants is comparable to the best in the world. The bulk of the production
is of urea, based on gas mainly from the Bombay High Fields which is
transported through the HBJ pipeline.
A thriving Fertiliser Industry holds the key not only to food security but
also to the performance of the agricultural sector as a whole. This
industry has not only provided the agricultural sector with needed
nutrients, but also with extension services. However, much more needs to be
done to revive the fortunes of the agricultural sector. One of the
principal problems of our agriculture is the low productivity of our farms.
India has a much larger acreage under cultivation in comparison with China
(170 million hectares in India Vs 154 million hectares in China). However,
India produces approximately half the output of China. Such low
productivity is also correlated with low fertiliser usage. An Indian farmer
uses only 100 kgs. of nutrients per hectare compared with 288 kgs. in
China. This needs to be corrected, apart from providing other much needed
farming inputs such as quality seeds, water, power and use of modern
technology. Such a transformation of the Agriculture sector can unleash the
growth potential of this sector. In such a scenario, apart from meeting the
growing domestic demand, India's farmers can also access the world markets
with the opening of world trade to farm output. To achieve such
transformational change, the country will need a higher production of
fertilisers and the setting up of a number of mega fertiliser plants. But
the growth of the Fertiliser Industry is not possible without a more
congenial long-term policy environment facilitating large investments.
KEY CHALLENGES BEFORE THE FERTILISER INDUSTRY
No industry in today's economic order can survive without growth. From its
modest beginnings, the industry has developed into a major industry,
playing a key role in the country's economy. Today, however the industry
seems to have reached a dead end.
For growth, what is needed is large-scale investment. For over a decade,
there has been no new investment in fertilizers. The Gadepan II plant of
Chambal Fertilisers was the last facility to be setup for manufacture of
Urea, the principal source of one of the key nutrients. No new plant is on
the anvil. It is estimated that the setting up of a new gas-based plant of
an economic size would cost well over Rs. 2500 crore. In the present
scenario, the industry cannot attract a capital of such magnitude in view
of the low returns and an uncertain policy regime.
Some of the plants in the country have aged or are ageing fast and require
investment capital for revamp and modernisation to effectively compete in
today's globalised economy. With the present infrastructure, technology and
skilled manpower at its command, it would not be difficult for the industry
to live up to new challenges.
WHAT IS HOLDING THE INDUSTRY BACK AND WHAT IS NEEDED TO BE DONE
The Fertiliser Industry is facing more problems than any other industrial
sector in the country. Most of these problems have arisen because of
factors beyond the industry's control such as an unabated increase in the
costs of inputs driven by high crude oil prices and an ad hoc regulatory
environment. Over the years, no long-term solutions have been found to get
around these problems.
First of all, the industry is facing an unhelpful policy environment and a
regime pricing that has made it unattractive for investment capital to flow
in. The policy environment lacks a long-range strategy. Policy exercise is
based on adhocism and expediency, obsessed as it is with a single-minded
focus on reduction of the subsidy burden. The increase in subsidy is a
direct consequence of the escalating input costs over which the fertiliser
units have no control. The need for fertiliser subsidy stems from the
country's need to support the Agriculture sector in general and the
millions of marginal farmers in particular. Also, it needs to be recognised
that the aggregate subsidy to Indian Agriculture is much lower than
subsidies provided by other countries. The total subsidy (Food plus
Fertiliser subsidies) provided to farmers in India in 2004 is estimated at
USD 9 billion and this is a small fraction of subsidies being provided in
the OECD countries. Strangely, there is a popular misconception that a huge
subsidy fills the coffers of the industry. On the contrary, the benefits of
subsidy go to the farmers alone who need it badly. The Fertiliser Industry
is only used as a vehicle to distribute the subsidy to the farmers. The
prices that the farmers are required to pay for fertilisers like urea have
increased very modestly over 20 years. Had the fertiliser prices been
increased in proportion to the increase in the cost components or at least
to the extent of inflation in the country, the amount of subsidy could have
been contained. The consumer price of fertilisers in India is in fact one
of the lowest in the world. Any attempt to arbitrarily reduce the subsidy
will only have a crippling effect on the industry and expose Indian
agriculture to the vagaries of global nutrient prices over which the
Government has no control.
Further, lack of decisiveness in policy making is another inhibiting
factor. This is reflected in the appointment of numerous committees to
diagnose the ailments of the industry and to suggest remedies. Since 1986,
several committees were appointed to study the problem. The committees went
into the whole gamut of pricing and subsidy. These efforts did not result
in any viable solutions. In fact, the prevailing confusion only got worse.
The last committee was under the Chairmanship of an eminent economist Dr.
Y. K. Alagh. This committee was given very broad terms of reference, and
industry was very hopeful that Dr. Alagh, who was associated with earlier
policy issues relating to the Fertiliser Industry, would recommend a fair
and equitable long term-policy. The policy was expected to provide
incentives to the industry and enable it to play a key role in our
integrated agriculture policy so vital for the country's sustained economic
growth. Unfortunately the committee's recommendation, if implemented in its
original form, would have caused irreparable damage to many of the
fertiliser units in the country. The worst affected would have been the
gas-based plants based on modern technology which meet the global standards
of efficiency norms. Under the circumstances, the industry held several
discussions with the Department of Fertiliser to highlight its concerns
regarding some of the key aspects of the proposed recommendations. The
industry has been assured that these concerns will be suitably addressed
and we hope that the new policy for stage III of New Pricing Scheme, which
will be implemented retrospectively with effect from 1st April, 2006, will
assist the sustainability of the industry and lead to its growth.
However, even such modified policy will not provide a durable and long-term
solution to the reform of this vital industry. There is need for a new and
emphatic approach to unshackle the industry. It is my belief that such a
fundamental and path breaking review is possible only if a new committee is
appointed under the Chairmanship of an eminent and an independent person
like a refereed Chief Justice of the Supreme Court. Such a committee should
take a holistic view of the entire gamut of issues and provide a long-term
solution rather than a limited focus on subsidy, which as mentioned earlier
is for subsidising the farmers. Such an action can be integrated with an
overall plan to revamp and reform our country's agriculture.
OPERATIONS
The performance of your Company during the financial year 2005-06 was
satisfactory.
The Company has produced 19.02 lac MT of Urea during the year against 18.55
lac MT produced during the last year. The production during the year was
the highest ever achieved. During the year, the Company also sold 18.90 lac
MT of Urea compared to 18.24 lac MT sold during the last year. There was a
quantum jump in the trading activities of the Company. The Company has
achieved sales of Rs. 631.77 crore from traded products which was 83%
higher than that of the last year. The performance of the Shipping Division
of the Company was satisfactory. The turnover of Shipping Division was Rs.
175.09 crore during the year under review as against Rs. 83.22 crore
achieved during the period September 2004 to March 2005. The performance of
Textile and Food Processing Divisions of the Company was also satisfactory.
Both the Fertiliser plants of the Company are capable of running on natural
gas. During the year under review the Company converted Gadepan-I plant
fully to gas and Gadepan-II plant is now using 70% gas compared with nil in
the previous year. Both units will be fully operating on gas when the new
spur gas pipeline, currently under construction, is commissioned. This
conversion to gas will reduce the subsidy burden of the Government without
any detrimental effect on the profitability of the Company.
The turnover of the Company during the year was Rs. 2740.62 crore as
against Rs. 2679.47 crore during the last year. This turnover was achieved
despite higher use of low cost natural gas instead of Naphtha. The Company
has recorded a profit (before exceptional items and tax) of Rs. 241.10
crore which is 11.50% higher than Rs. 216.21 crore achieved during the last
year. During the year the company sold one third of its holding in Indo
Maroc Phosphore S.A., Morocco for an aggregate consideration of Rs. 83
crore and the profit on this sale was Rs. 40.43 crore.
The Company plans to carry out de-bottlenecking of both its fertiliser
plants at Gadepan for increasing its production capacity. Detailed project
reports in this regard have already been submitted to the Government of
India and their approval is awaited.
Shipping is a promising sector and your Company is gradually increasing its
presence in this business segment. Shipping not only provides an additional
opportunity of growth, it is also instrumental in diversification of the
risk profile of the Company. The Company has taken delivery of a 2006 built
Aframax Tanker - 'Ratna Puja' - in June 2006. Further, the Company has
placed orders for 3 new coated Aframax Tankers of 1,05,000 dwt, at a price
of USD 65 million each. These ships are expected to join the fleet of the
Company during the financial year 2008-09.
As a part of its growth strategy, your Company has decided to expand the
capacity of its Textiles Division. The Textile industry is the biggest
industry in the country. The Company's unit at Baddi in Himachal Pradesh is
doing well. The erection of a 39,744 new spindles facility is under way,
and is expected to be commissioned by the end of the current financial
year. We shall continuously examine further expansion and diversification
opportunities in this industry.
ACKNOWLEDGMENTS
The employees of the Company have made a remarkable contribution to its
success. The Company thanks the Government of India and the Government of
Rajasthan for their support. We also appreciate the co-operation of all
other business associates. On behalf of the Board and on behalf of myself,
I extend my sincere gratitude to all stakeholders.
Dr. K. K. BIRLA
Chairman
SOURCE : Business Standard
DATED : 29th August 2006