India Aims to Address 100 Lakh Tonnes Urea Supply Gap with New Investment Policy

Government Prepares New Investment Policy for Urea Sector to Bridge Supply Gap

The Indian government has prepared a Cabinet note for a fresh investment policy in the urea sector aimed at incentivizing new plant capacity to bridge a supply gap of nearly 100 lakh metric tonnes. This move comes as India continues to face a structural demand-supply gap, with domestic production of around 300 lakh metric tonnes against demand of nearly 380-400 lakh metric tonnes, implying import dependence of about 20-25 percent.

The proposed policy is currently under inter-ministerial consultation and is expected to define a subsidy framework with floor and ceiling rates for up to eight years. The levels will be decided based on prevailing conditions. The policy is aimed at providing clarity to investors in a price-controlled regime where the urea maximum retail price remains fixed.

The government does not provide any direct financial support for setting up these plants. It only defines the policy framework, including floor and ceiling rates, and then it is up to the industry to invest. The ceiling is expected to be fixed for about eight years, and companies would typically be required to set up plants within four years under such a policy.

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Key Statistics Comparing Demand and Supply

The policy discussions also come amid expectations of a rise in fertiliser subsidy outgo in FY27, driven by volatile global prices and supply disruptions. Subsidy expenditure, budgeted at around Rs 1.7 lakh crore, is estimated to increase to over Rs 2 lakh crore.

The proposed policy is likely to be modelled on the New Investment Policy (NIP)-2012, which had earlier incentivised fresh investments in the sector. Under NIP-2012, six urea plants were set up, including four public sector joint venture units and two private sector units. These projects together added around 76 lakh metric tonnes of annual urea production capacity, significantly boosting domestic output over the past decade.

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However, with the policy period now over and demand continuing to outstrip supply, the government is working on a fresh framework to drive the next phase of capacity expansion. Officials said that while the policy aims to boost domestic capacity, underlying constraints such as fuel availability could limit its effectiveness.

The core issue in the fertiliser sector remains the availability of gas. Even if you create 100 percent domestic capacity, without adequate availability of raw materials and fuel, import dependence will persist. Urea is sold at an effective retail price of about Rs 266 per 45 kg bag, while the actual cost of production typically ranges between Rs 1,200 and Rs 1,700 per bag depending on gas prices, with the gap covered through government subsidy.