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.
Ramaswamy, Chief Manager (Corporate Planning), Krishak Bharti
Cooperative Limited; Mr. Ram Gopal, Addl. General Manager, Pyrites,
Phosphates .& Chemicals Limited; Mr. G. Raghavendran, Managing Director,
Manali Petrochemical Limited; Mr. R. Ghosh Hajra, Asst. General Manager,
IBP Co. Limited; Mr. S.J. Naidu, Sr. Manager (MS & CP), Godavari Fertilisers
and Chemicals Limited; Mr. B.S.S. Gupta, Group General Manager, Indian
Farmers Fertiliser Cooperative Limited; Mr. D. K. Puri, General Manager, Shri
Ambuja Petrochemicals Limited; Mr. V. Ganeshan, Dy. General Manager
(Corporate Planning), IOL Limited; Mr. B. N. Puranmalka, Managing Director,
Indo-Gulf Fertilisers Limited; for sparing their valuable time for discussion and providing necessary data and information.
I shall be ever indebted to my brother Professor S. S. Sahay, IIM, Lucknow for
taking keen interest in my research and giving constant advise, suggestions
and support at each stage of work.
I am grateful to Professor D. K. Banwet, Professor Sushil, Dr. J. M. Mahajan
and Dr. Arun Kanda for their valuable suggestion and support.
I am thankful to my employer M/s. National Productivity Council, especially to
Mr. S. Ghosh, Director General, Mr. V. Vihari, Dy. Director General (TS), Mr.
R. C. Monga, Dy. Director General (MS), Mr. S. A. Khader, Director (IS &
TOM), Mr. J. Kumar, Regional Director, and Mr. M. M. A. Khan, Director for
their moral support.
My sincere thanks are also due to friends and colleagues especially to Dr.
Saroj Koul, Mr. M.Agrawal, Mr. Sushi! Peter, Mr A. Gupta, Mr. K. L. M. Jain,
Mr. R. Baruah, Mr. K. P. Ashwin, Mr. S. R. Murli and Mr. A. Seth for their help.
My appreciation also goes to Mr. S. K. Nigam for typing manuscript with
accuracy and precision and to Mr. S. Phadke for preparing the drawings.
Last but not the least, my preoccupation with this work caused lot of
inconvenience to my family members in the hour of their need deserve special
mention. Without their blessings, cooperation and inspiration, this study could
not have been possible.
New Delhi
2hth July 1994 BIDYA SHANKER SAHAY
ABSTRACT
Increasing techno-socio-economic complexities of business and industrial
environment, liberalisation and globalisation of Indian economy, tough
competition in domestic and world market, scarcity of resources and
Government policies have made strategic planning inevitable. This thesis aims
to gain insight regarding the strategic planning and policy modelling for fertiliser
industry to analyse the growth dynamics of the fertiliser scenario in India
including Government pricing and subsidy policies, above all, growth dynamics
of a fertiliser company. A major contribution of the present study is the
development of integrated system dynamics models at national level and at
company level for fertiliser sector. The study demonstrated the utility of system
dynamics in developing integrated models through an application to the fertiliser
sector at national level and developing a corporate planning model at company
level. The thesis is broadly divided in four phases spread over nine chapters.
The first phase relates to the problem identification, main issues and scope of
the research and specifying the objective of the research. Literature on
corporate planning and models are reviewed. Survey on corporate planning is
conducted to analyse the state-of-art of corporate planning practices followed in
Indian industries pertaining to oil, petrochemical and fertiliser industries. This
has been discussed in second phase of the thesis.
The third phase of the study is devoted to the brief profile of the fertiliser
industry in India. System structures (cause and effect relationship) are identified
for fertiliser sectoral model, pricing and subsidy model and corporate planning
model. There are altogether 509 variables comprising 51 level variables, 57 rate
variables and 401 auxiliary and other variablesin all the three models.These
models are run on microcomputer using DYNAMO Plus Compiler and simulated
results give future projections. The fourth and last phase of the thesis has dealt
with validation of above models. Validation has been done both qualitatively
and quantitatively. While qualitative validation includes comparison of actual
and model values, comparison of simulated behaviour and quantitative
validation for all the three models are done by carrying out statistical tests (t-test
and F-test) to see the fitness of the models for the purpose intended.
Further sensitivity analysis and policy testing is carried out in this phase taking
166 runs under different options. A set of desirable policy parameters are
selected to test the policy to project pessimistic and optimistic scenarios and
compared with the normal scenario. Policy implications and imperative are
drawn on the basis of these policy tests. The last phase of the thesis, inter-alia,
sums up includes followed by major findings and significant contribution of the
research followed by set of recommendations. The thesis, finally, ends with
limitation of the study and suggestions for the further research in this areas.
ii
CONTENTS
CHAPTER DESCRIPTION PAGE NO.
ABSTRACT
LIST OF TABLES xi
LIST OF FIGURES xiii
LIST OF APPENDICES xxiv
LIST OF VARIABLES xxv
INTRODUCTION TO THE STUDY 1-7
1.1 Introduction ... 1
1.2 Objective of the Research 2
1.3 Main Issues ... 3
1.4 An Overview of the Study ... 4
1.5 Concluding Remarks 7
II LITERATURE SURVEY 8-43
2.1 Introduction ... 8
2.2 Basis of Review ... 9
2.3 Pictorial Scheme for the Literature Review ... 9
2.4 Strategic Planning ... 11
2.4.1 Definitions and Concepts ... 11 2.4.2 Coverage and Contents ... 13
2.5 Strategic Planning Methodology ... 15
2.5.1 Procedural Steps for Formulating Plans and Strategies ... 15 2.5.2 Procedure for Monitoring and Control of Strategic
Planning Functions ... 17
2.6 Review of Strategic Planning Survey 18
2.7 Strategic Planning Models ... 22
2.7.1 Optimisation Models ... 22 2.7.2 Econometric Models ... 23 2.7.3 Simulation Models ... 25 2.7.4 System Dynamics Models ... 28 2.7.5 Models Based on Other Techniques ... 33
2.8 Current State of Research ... 35
2.9 Limitation of Existing Approaches ... 36
2.9.1 Optimisation Models ... 36 2.9.2 Econometric Models ... 37 2.9.3 Simulation Models ... 39 2.9.4 System Dynamics Models ... 39
2.10 Need for Further Research and Area of Study ... 40
2.11 Concluding Remarks ... 42
III CORPORATE PLANNING PRACTICES IN INDIAN OIL, PETROCHEMICAL AND FERTILISER INDUSTRIES - A SURVEY 44-80
3.1 Introduction ... 44
3.2 Methodology adopted for Conducting the Survey ... 44
3.3 Structuring the Survey questionnaire ... 45
3.4 Analysis of Feedback ... 45
3.4.1 Profile of the respondent Organisation ... 47 3.4.2 Financial Aspect of Corporate Planning
Survey ... 53 3.4.3 Strength, Weaknesses, Opportunities and
Threats (SWOT) Analysis ... 61 3.4.4 Strength and Weaknesses of the Organisation 65 3.4.5 Opportunities and Threats before the
Organisations ... 69 ... 69
3.4.5.1 Opportunities ... 72 3.4.5.2 Threats
... 74 3.4.6 Various Facets of Corporate Planning
- Organisations View
iv
3.5 Concluding Remarks ... 79
IV INDIAN FERTILISER INDUSTRY - AN OVERVIEW 81-98
4.1 Introduction ... 81
4.2 Fertiliser - The Key Element ... 81
4.3 Fertiliser Production and Consumption ... 82
4.4 Fertiliser Prices, retention Price scheme and Subsidies ... 88
4.4.1 Fertiliser Prices 88 4.4.2 Retention Price Scheme ... 88
... 90 4.4.2.1 Impact of RPS on Growth of Industry ... 92 4.4.2.2 Set Backs in RPS ... 93
94 4.4.3 Escalating Fertiliser Subsidy ... 97
4.4.3.1 Factors behind Growing Subsidy 4.4.4 Recent Important Policy Changes
4.5 The Approach ... 97
4.6 Concluding remarks ... 98
V MODELLING GROWTH DYNAMICS OF FERTILISER SECTOR 99-153
5.1 Introduction ... 99
5.2 Procedural Steps in System Dynamics Modelling ... 100
5.3 System Dynamics Modelling ... 100
5.3.1 Causal Loop Diagrams
5.3.1.1 Positive Feedback Loops 5.3.1.2 Negative Feedback Loops
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
vi
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
vii
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
viii
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
ix
IX MAJOR CONCLUSIONS, LIMITATIONS AND SCOPE OF FURTHER WORK 337-347
9.1 Introduction ... 337
9.2 Summary of Research Findings ... 337
9.3 Significant Research Contributions ... 340
9.4 Limitations of the Present Study ... 345
9.5 Areas for Further Work ... 346
9.6 Concluding Remarks ... 347
REFERENCES 348-374
APPENDICES 375-386
CURRICULUM VITAE 387-388
