In a bid to cut subsidy on fertilisers, a ministerial group headed by finance minister Pranab Mukherjee on Friday recommended partial decontrol of urea prices.

“Phased-decontrol of urea is in the offing. The new policy would give flexibility to fertiliser companies to fix urea price at retail outlets. Initially, the government will not allow the urea producers to increase its price beyond 10 per cent,” said a fertiliser ministry official on conditions of anonymity.

At present, every tonne of urea costs nearly Rs 5,250. This plan in sync with the recommendation of an high-powered panel headed by planning commission member Saumitra Chaudhuri.

In effect, the urea subsidy would be pruned to reduce fiscal burden on the government. However, the fertiliser companies that are converting their urea facilities to gas-based will be eligible for an additional subsidy of Rs 50 per tonne. This additional subsidy would be available for next two years during which the companies will have to complete the fuel conversation from naphtha or furnace oil or to gas fired urea facility. Mukherjee in his last budget pegged fertilizer subsidy at Rs 49,998 crore.

For all the gas-based urea projects, a pooled price mechanism for natural gas would be put in place to fix the subsidy on urea. After 2013, government would allow complete decontrol.

“The new policy means a fixed subsidy for urea with a open retail price,” said Satish Chander, director general of The Fertiliser Association of India.

Currently, there are 29 fertiliser units in India producing urea. Out of this, 21 are gas-fired. Four units are naphtha based and rest use furnace oil as feedstock.

India consumes nearly 26-27 million tonnes of urea every year. Out of this about 22 million tonnes are indigenously produced and additional 5-6 million tonnes are imported.

“Pool-price mechanism for gas can be implemented easily,” said Rakesh Kapur, joint managing director at IFFCO.

At present, the production cost for every tonne of urea varies from Rs 10,000-12,000 in a gas-fired unit to as high as Rs 35,000 for a naphtha-fired unit.

The recommendations of Mukherjee-led panel will need clearance from cabinet committee on economic affairs (CCEA) headed by prime minister Manmohan Singh. The CCEA nod is expected shortly

The plan approved by ministerial group is similar to the nutrient based subsidy scheme (NBS) allowed for all phosphates and complex fertilisers in the past financial year.

Fertiliser minister M K Alagiri and his department had reservations on implementation of NBS regime. This opposition was set aside by CCEA and the same was approved last year.

The partial decontrol of urea decontrol has come close to talks on Friday of when government hinted that there could be a market-related price for diesel used by passenger cars.