Direct transfer of subsidy to farmers hold the key to countenancing all ills afflicting the fertilizer sector in India. Successive governments have talked about it and yet, none has ventured to implement this concept. What has held them back?
The idea was first mooted nearly 4 decades ago when in March 1976, faced with increasing prices of complex phosphate fertilizers (then, there were no controls and manufacturers were free to fix price), the government introduced flat subsidy @ Rs 1250 per ton phosphate nutrient (P2O5).
The initial plan was to give the money directly to farmers so that the effective price (net of subsidy) paid by them for these fertilizers was correspondingly reduced say by Rs 575 per ton in case DAP a popular complex fertilizer (it has 46% P2O5).
But, it was abandoned as policy makers thought it was physically impossible to distribute the money to millions of farmers in every nook and corner of the country. They were also apprehensive about farmers using money for the intended purpose.
Instead, government decided to give subsidy to manufacturers with a direction that they would reduce price to farmers by that much amount. There being few manufacturers, it was easier to administer and monitor use of subsidy through this route.
Meanwhile, from November 1, 1977 government introduced retention price scheme (RPS) for urea under which manufacturers were given subsidy equal to excess of their reasonable cost of production and distribution over controlled maximum retail price (MRP).
From February, 1979, complex fertilizers too were brought under RPS. The scheme was administered by a body called Fertilizer Industry Coordination Committee (FICC) under department of fertilizers (DoF). With a small budget, it was disbursing subsidy running in to hundreds/thousands of crores.
A second time, government thought through this idea was in 1991-92 when under pressure from International Monetary Fund (IMF), it was forced to increase MRP of all fertilizers by 40%. Due to a hue and cry raised by political parties across the spectrum, the hike in price was truncated to 30% for small and marginal farmers.
However, government decided to give the amount corresponding to 10% differential in price directly to farmers. The centre gave funds to state governments with an advice to make arrangements for transfer to beneficiary farmers in their domain.
How did this pan out? In a statement made in the parliament, the government informed that only 3.5% of farmers benefited from the move. The experiment was a fiasco. From the following year 1992-93, the direct subsidy scheme was quietly withdrawn.
Due to continuing IMF/World Bank pressure, from August 25, 1992 government was forced to decontrol all complex phosphate fertilizers and abolish subsidy. This led to steep increase in their price triggering a political backlash. In just about 5 weeks, it resurrected subsidy as ad hoc concession from October 1, 1992.
With this, a third time central government mooted idea of direct transfer to farmers to be routed through states. But, latter did not even give it a try; instead, they passed on money to manufacturers with a direction to lower MRP equal to concession amount.
This led to utter chaos as states delayed payments to manufacturers, paid less than what was legitimately due to them and even forced them to sell at artificially low prices. Some states like Bihar did not pay at all and diverted funds to other uses.
Frustrated with mess created by states each time they were roped in, from 1997-98 central government reverted to making direct payment to manufacturers. The dispensation continues till date.
Meanwhile, in Budget for 2012-13, then UPA government announced tracking movement of fertilizers from retailer to farmers and linking part of subsidy payment to manufacturers to sale of fertilizers to farmers by retailers. In the mid-year economic analysis of 2012-13, finance ministry came out with a blueprint on modalities for its implementation.
As per this blue print, pilot projects in 10 districts spread over nine states were to be launched. After successful implementation in these districts, cash subsidy was be transferred to farmers in next phase from April 1, 2013. Concurrently, tracking movement of fertilizers was be rolled out in the whole country.
Department of Fertilizers (DoF) had even developed a mobile Fertilizer Monitoring System (m-FMS) that provides information about stock position, sale and receipt of fertilizer till the last retail point. Yet, direct subsidy transfer to farmers eludes!
Earlier, government was hamstrung due to lack of technology and infrastructure. Today, with m-FMS in place and roaring success of PM’s Jan Dhan Yojna (PMJDY) (over 65 million accounts have already been opened), these constraints no longer exist. A public financial management system (PFMS) is also being installed to track fund flow and ensure that there is no pilferage and money reaches beneficiary’s account.
What then, government is waiting for? Why is it not coming clean? Why does it not say, the scheme will be implemented by so and so date? The prime reason for dithering lies elsewhere.
Under present scheme of things, urea manufacturers get compensated for excess of their production and distribution cost over controlled MRP as subsidy. Under new pricing scheme (NPS) – a new incarnation of erstwhile RPS – each unit gets a different subsidy depending on its cost which varies widely.
While, current MRP is Rs 5360 per ton, production cost can vary from a low of about Rs 11,500 per ton for an efficient gas based plant to Rs 40,000 per ton plus for plants on alternate feed stock such as naphtha, fuel oil etc. Some plants in latter category also happen to be under public sector undertakings (PSUs).
In a scenario of direct subsidy transfer to farmers and support under NPS gone, manufacturers will have to compete in market place on the basis of their production cost and it is likely that high cost units including those under PSUs will loose in the race.
Though in public posturing, political establishment may still cite implementation issues, government’s real worry stems from the inevitable fall-out of disbanding the protective umbrella for high cost especially PSU units.
Is Modi prepared to bell the cat?