THESIS SUBMITTED N FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF • -t 'DOCTOR OF PHILOSOPHY T. DELHI ' LIBRA-F1N( 11 ) 17. - V 8 . 7.. itco. 0- -.• STRATEGIC PLANNING AND POLICY MODELLING FOR INDIAN FERTILISER INDUSTRY - A SYSTEM DYNAMICS APPROACH by BIDYA SHANKER SAHAY Department of Mechanical Engineering INDIAN INSTITUTE OF TECHNOLOGY, DELHI JULY, 1994
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THESIS SUBMITTED N FULFILMENT OF THE REQUIREMENTS
FOR THE DEGREE OF
• -t 'DOCTOR OF PHILOSOPHY
T. DELHI' LIBRA-F1N(
11)17.-V8.7.. itco. 0- -.•
STRATEGIC PLANNING AND POLICY MODELLING FOR INDIAN FERTILISER INDUSTRY -
A SYSTEM DYNAMICS APPROACH
by BIDYA SHANKER SAHAY
Department of Mechanical Engineering INDIAN INSTITUTE OF TECHNOLOGY, DELHI
JULY, 1994
CERTIFICATE
The thesis entitled Strategic Planning and Policy Modelling for Indian
Fertiliser Industry - A System Dynamics Approach being submitted by Mr.
Bidya Shanker Sahay to the Indian Institute of Technology, Delhi, for the
award of the degree of the Doctor of Philosophy, is a record of bonafied
research work carried out by him. He has worked under our joint supervision,
anci has fulfilled the requirement for the submission of the thesis which has
attained the standard required for a Ph. D. degree of the Institute.The results
presented in this thesis have not been submitted elsewhere for the award of
any degree or diploma.
DTP/. Jain Dr. Prem Vrat
Pr of es s o r of Finance Professor of Industrial Engg.
SVpartment of Management Studies Department of Mechanical Engg.
Indian Institute of Technology Indian Institute of Technology
Delhi Delhi
ACKNOWLEDGEMENT
It is, indeed, difficult to express my feelings for those who have contributed
one way or other to my research work. I owe a great deal to each of them.
I express my deep sense of gratitude to Professor Prem Vrat and Professor
P.K.Jain for their sincere guidance, constant encouragement and profound
advise. , The thesis in this shape has been possible due to invaluable
suggestion and stimulations of Professor Vrat and Professor Jain, inspite of
their busy schedule.
I am thankful to Mr. Pratap Narayan, Executive Director, Dr. U. Gupta, Chief
Economist, Mr S. Sahai, Director (Statistics), T.S. Sundaram, Chief Personnel
Relations, Dr. S. Nand, Chief Technologist of Fertiliser Association of India,
Dr. Ashok Gulati, Director, Dr. Rajesh Chaddha, Sr. Economist of National
Council of Applied Economic Research, Mr. P. K. Agarwal, Dy. General
Manager (Corporate Planning), Indian Oil Corporation; Mr. Rajeev Khanna,
Strategic Planning Adviser, Oil India Limited; Mr. A.S. Sapre, Chief Corporate
Planning Manager, Hindustan Petroleum Corporation Limited; Mr. A.K.
Kannan, Dy. General Manager, Hindustan Fertiliser Corporation Limited; Mr.
Y.K. Matto, Addl. Chief Engineer, National Fertilisers Limited; Mr. H. N.
5.3.2 Structural Details of System Dynamics Modelling
5.3.3 System Dynamics Software and Compilers
5.4 System dynamics Model for Fertiliser Sector
... 101
... 103
... 103
5.5 Causal Loop Diagrams of Fertiliser Sector ... 104
5.6 Flow Diagrams of Fertiliser Sector ... 104
5.7 Equation Formulation for Fertiliser Sector ... 109
5.7.1 Population 109 5.7.2 Foodgrain Demand 109 5.7.3 Foodgrain production 110 5.7.4 Cultivation Land 111 5.7.5 Foodgrain Yield 112 5.7.6 Available Food Per Capita 113 5.7.7 Total Fertiliser Requirement 114 5.7.8 Fertiliser Output-Input Ratio 116 5.7.9 Total Installed Capacity 117 5.7.10 Installed Capacity of Nitrogenous Fertiliser 117 5.7.11 Installed Capacity of Phosphatic Fertiliser 118 5.7.12 Production of Nitrogenous Fertiliser 119 5.7.13 Production of Phosphatic Fertiliser 120 5.7.14 Import of Fertilisers 121 5.7.15 Fertiliser Demand and Consumption 122
5.8 Equation Formulation for Fertiliser Pricing and Subsidy Policies ... 123
... 123 5.8.1 Total Subsidy on Fertilisers 5.8.2 Subsidy on Indigenously Manufactured ... 123
Fertiliser 5.8.3 Subsidy on Indignously Manufactured ... 124
Nitrogenous Fertiliser ... 125 5.8.4 Consumer Price of Nitrogenous Fertiliser 5.8.5 Average Retention Price for Nitrogenous 126
fertiliser 127 5.8.6 Total Feedstock cost for Nitrogenous Fertiliser 128 5.8.7 Total Cost of Natural Gas Consumed 130 5.8.8 Total Cost of Naptha Consumed 131 5.8.9 Total Cost of Fuel Oil Consumed 132 5.8.10 Total Cost of Ammonia Consumed 133 5.8.11 Total Cost of Coal Consumed 134 5.8.12 Other Related Costs 5.8.13 Subsidy on Indigenously Manufactured ... 134
Phosphatic Fertiliser ... 135 5.8.14 Consumer Price of Phosphatic Fertiliser 5.8.15 Average Retention Price of Phosphatic 136
fertiliser 137 5.8.16 Total Feedstock cost for Phosphatic Fertiliser 138 5.8.17 Total Cost of Rock Phosphate Consumed 139 5.8.18 Total Cost of Sulphur Consumed 140 5.8.19 Total Cost of Phosphoric Acid Consumed 141 5.8.20 Other Related Costs 142
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5.8.21 Total Subsidy on Imported Fertiliser ... 143 .5.8.22 Subsidy on Imported Nitrogenous Fertiliser ... 144 5.8.23 Landed Price of Nitrogenous Fertiliser 5.8.24 Pool Handling Expense for Nitrogenous ... 144
fertiliser ... 145 5.8.25 Total Landed Price of Nitrogenous Fertiliser ... 146 5.8.26 Subsidy on Imported Phosphatic Fertiliser ... 146 5.8.27 Landed Price of Phosphatic Fertiliser 5.8.28 Pool Handling Expense for Phosphatic ... 147
Fertiliser ... 147 5.8.29 Total Landed Price of Phosphatic Fertiliser ... 148 5.8.30 Subsidy on Imported Potassic Fertiliser ... 148 5.8.31 Landed Price of Potassic Fertiliser ... 149 5.8.32 Pool Handling Expense for Potassic Fertiliser ... 150 5.8.33 Dealer's Margin on Potassic Fertiliser ... 150 5.8.34 Total Landed Price of Potassic Fertiliser ... 150 5.8.35 Consumer Price of Potassic Fertiliser ... 151 5.8.36 Total Subsidy on Transport of Fertiliser ... 152 5.8.37 Inflation Rate
5.9 Concluding Remarks ... 152
VI CORPORATE PLANNING MODEL OF A FERTILISER ORGANISATION - A CASE STUDY 154-190
6.1 Introduction ... 154
6.2 Background of the organisation ... 154
6.3 Causal Loop Diagram ... 155
6.4 Flow Diagram ... 155
6.5 Equation Formulations ... 158
6.5.1 Installed Capacity ... 158 6.5.2 Capacity Utilisation ... 160 6.5.3 Possible and Actual Production ... 160 6.5.4 Desired Production ... 161 6.5.5 Acquired Market Share ... 162 6.5.6 Total Manufacturing Cost ... 162 6.5.7 Average Manufacturing Cost ... 164 6.5.8 Average Selling, Administrative and Other
Expenses ... 164 6.5.9 Total Selling, Administrative and Other
Expenses ... 165 6.5.10 Average Transportation and Handling Cost ... 165 6.5.11 Total Transportation and Handling Cost ... 166
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6.5.12 Average Packing Cost ... 166 6.5.13 Total Packing Cost ... 166 6.5.14 Inflation Rate ••• 167 6.5.15 Total expenses ... 168 6.5.16 Average Expenses per Tonne 168 6.5.17 Sales 168 6.5.18 Consumer Price of Nitrogenous Fertiliser 169 6.5.19 Retention Price Support 170 6.5.20 Net Revenue 171 6.5.21 Average Price Per Tonne 171 6.5.22 Profit Before Depreciation, Interest and Tax 171 6.5.23 Earning Before Interest and Tax 172 6.5.24 Profit Before Tax 172 6.5.25 Tax 172 6.5.26 Net Profit After Tax 173 6.5.27 Dividends 173 6.5.28 Total Equity Capital 174 6.5.29 Book Value of Share 174 6.5.30 Market Price of Share 175 6.5.31 Bonus Share Issue 175 6.5.32 Offered Price of New Shares 176 6.5.33 Premium 176 6.5.34 Issue of New Shares 177 6.5.35 Number of Shares 178 6.5.36 Reserves 178 6.5.37 Internal accruals Available for Investment 179 6.5.38 Total Secured Loan 179 6.5.39 Total Unsecured Loan ... 181 6.5.40 Total Interest ... 182 6.5.41 Additional secured Loans ... 182 6.5.42 Additional Unsecured Loans ... 183 6.5.43 Additional equity Capital ... 183 6.5.44 Total Capital employed ... 184 6.5.45 Net Worth ... 184 6.5.46 Additional finance Available for Investment ... 184 6.5.47 Retained Earnings to Equity ... 185 6.5.48 Depreciation ... 185 6.5.49 Funds Requirement for Expansion and
Modernisation 186 6.5.50 Debt Equity Ratio 186 6.5.51 Interest Coverage Ratio 187 6.5.52 Profit Margin Ratio 187 6.5.53 Earning Per Share ... 187 6.5.54 Payout Ratio .. 188 6.5.55 Price Earning Ratio ... 188 6.5.56 Yield ... 188 6.5.57 Reserve to Equity Ratio ... 189 6.5.58 Rate of Return on Networth ... 189
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6.5.59 Leverage ... 189
6.6 Concluding Remarks ... 190
VII VALIDATION OF SYSTEM DYNAMICS MODELS 191-257
7.1 Introduction ... 191
7.2 Model Validation Review ... 191
7.3 Validation of Models Developed ... 193
7.3.1 Validation of Fertiliser Sector Model 193 7.3.2 Validation of Pricing and Subsidy Model ... 193 7.3.3 Validation of Corporate Planning Model ... 210
7.4 Statistical Test for Model Validation ... 210
7.4.1 Fertiliser Sector Model ... 237 7.4.2 Pricing and Subsidy Model ... 237 7.4.3 Corporate Planning Model ... 237
7.5 Future Projections ... 238
7.6 Concluding Remarks ... 238
VIII SENSITIVITY ANALYSIS AND POLICY EXPERIMENTATION 258-336
8.1 Introduction 258
8.2 Sensitivity Analysis 258
8.2.1 Sensitivity Analysis of Fertiliser Sector Model 260 8.2.2 Sensitivity Analysis of Pricing and Subsidy
Model ... 268 8.2.3 Sensitivity Analysis of Corporate Planning
Model ... 273
8.3 Policy Experimentation ... 282
8.3.1 Comparative Analysis of Scenarios for Fertiliser Sector
8.3.2 Comparative Analysis of Scenarios for Pricing and Subsidy Model
8.3.3 Comparative Analysis of Scenarios for Corporate Planning Model
8.4 Concluding Remarks
... 285
... 310
... 325
... 335
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IX MAJOR CONCLUSIONS, LIMITATIONS AND SCOPE OF FURTHER WORK 337-347