Having been returned to power, we were looking forward to Modi kick off reforms in the fertilizer sector which were ignored by successive governments in the past.
The expectation was legitimate as any reform measure is bound to affect stakeholders in the immediate short-run but that is unlikely to pose any threat to the government which has a mandate to run for full five years and it does not have to face the electorate before this. So, now was the golden moment to go for the big bang.
But, the union budget presented by finance minister, Nirmala Sitharaman on July 5, 2019 has belied the expectation. There is no reference to fertilizers even as the allocation for fertilizer subsidy at about Rs 80,000 crore during 2019-20 [this does not provide for arrears of Rs 32,000 crore from 2018-19; including this, total requirement would be Rs 112,000 crore] says it all.
The fertilizer subsidy has remained high despite steps taken by the present dispensation viz. mandatory neem coating of urea, issue of soil health cards [SHCs] which were intended to curb diversion of urea to chemical factories and improve efficiency of urea use – aimed at bringing about reduction in fertilizer subsidy. This is because none of the crucial reforms crying for attention have been addressed. At the outset, let us capture some basics about the sector.
To make fertilizers affordable to farmers, the centre controls their maximum retail price [MRP] at a low level unrelated to their cost of production and distribution which is higher. The excess of cost over MRP is reimbursed to the manufacturer as subsidy. In case of urea, the subsidy varies from unit to unit and is administered under the New Pricing Scheme [NPS] whereas for decontrolled fertilizers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme [NBS].
The freight cost [it includes primary movement from the plant and secondary movement from the unloading rake point by road to the retailer] is reimbursed to urea manufacturers under a uniform freight policy. On the other hand, manufacturers of decontrolled complex fertilizers get reimbursement of freight cost only towards primary movement on the basis of actual rail freight, as per the railway receipts. They don’t get reimbursement on account of secondary movement from rail-head to the retail point.
The manufacturers of decontrolled complex fertilizers and MoP [muriate of potash] receive a step-motherly treatment vis-à-vis controlled urea. In case of the former, even as the government normally keeps the subsidy unchanged, increase in the cost leads to ever increasing MRP. In sharp contrast, for the latter, it keeps the MRP at a low level [the current price of urea Rs 5360 per ton is more or less the same as it was nearly two decades ago] even as all escalations in cost are absorbed by increasing subsidy.
This results in disproportionately low MRP of urea vis-a-vis the MRP of complex fertilizers and MoP prompting farmers to use more of the former and less of the latter. The discrimination against complexes [besides MoP] is also evident in their not getting freight subsidy on secondary transportation as also in denial of natural gas – the feed-stock used for making of ammonia, an intermediate for manufacture of complex fertilizers – to their manufacturers.
These disjointed policies are at the root of increasing imbalance in NPK use ratio, declining crop yield, deterioration in soil health and adverse impact on the environment. The issue of SHC can at best guide the farmers on proper fertilizer to use, but it can do little to stem the opposite impact of flawed policies.
The low MRP of urea also gives a strong incentive to traders/farmers divert to chemical industries or smuggle to neighboring countries where it fetches higher price. The neem coating of urea [on which Modi banked heavily to rein in this unhealthy practice] has not helped much or else we would have seen the results in terms of big reduction in subsidy [taking diversion @40%] which is not visible.
The extant unit-wise NPS for urea for subsidy determination does not reward low cost units even while protecting high cost units [thus, we have units producing @Rs 20,000/- per ton plus co-existing with others producing at half this cost]. Even in the non-urea segment where every unit gets the same subsidy, a manufacturer who manages some savings is not sure of retaining it as the government reserves the right to mop it up on examination of his cost data.
It gives no incentive to companies invest in R&D for delivering more efficient products to farmers or explore indigenous resources [at present, India depends heavily on import for meeting its fertilizer requirements viz. nearly 2/3rd in nitrogen, 90% in phosphate and 100% in potash]. As a result, even as farmers don’t get major break-through in yield, the country remains vulnerable to exploitation by global suppliers.
The system is also prone to misuse of subsidy. According to Economic Survey [2105-16], 24% of the fertilizer subsidy is appropriated by manufacturers, 41% gets pilfered on way to the farmers and 24% cornered by large farmers. Only 11% of the benefit actually goes to poor farmers [those with land holding < 2 hectares].
These glaring anomalies can be addressed by dismantling the controls on MRP and existing system of routing subsidy through manufacturers [with this, NPS and NBS will go]; instead, give subsidy directly to farmers via direct benefit transfer [DBT]. A mechanism should be found to exclude better-off/rich farmers for better targeting and lowering subsidy to sustainable level.
Early this year, there were reports of the finance ministry and NITI Aayog working on a road-map for DBT of fertilizer subsidy and even alluded to club this with the assistance @ Rs 6000/- per annum currently being given under PM-KISAN and give the total amount as quasi–universal basic income transfer. But, it seems the idea has not caught the attention of Modi 2.0.
While, this calls for some spade work, the least it could have done is bring the policy for urea at par with that for non-urea fertilizers by giving uniform subsidy to manufacturers under NBS [a group of ministers under then agriculture minister, Sharad Pawar had recommended this way back in 2012]. But, this is not done.
Alternatively, it could have affected some increase in urea MRP to demonstrate its intent to correct the imbalance in its price vis-à-vis complex fertilizers and MoP. But, even that was not to be.
Another doable was to be more ‘transparent’ in reporting subsidy figures by switching-over from the existing cash based system to accounting of subsidies on accrual basis [as recommended by the ‘expenditure management commission’ under Dr Bimal Jalan, ex-governor, RBI in 2015]. This too is not done.
Modi must not allow things to linger on. He should get cracking on fertilizer reforms not later than the next budget [February, 2020].