According to a survey by NITI Aayog, nearly 2/3rd of the farmers don’t favor direct benefit transfer [DBT] of fertilizer subsidy. It is not clear whether this view is representative of the vast swathe of the farming community [there are over 145 million farm households] in India. If, it is indeed the case and this is also the current thinking of the policy makers then, this would leave one shell shocked as this would tantamount to complete reversal of the thought process.
In Budget for 2012-13, the then government had announced linking subsidy payment to manufacturers to the sale of fertilizers to farmers by retailers. Pilot projects in 10 districts spread over nine states were to be run; after successful implementation, DBT to farmers was to be launched in these districts from April 1, 2013. All-India launch was contemplated from April, 2014. The plan did not move beyond the drawing board.
In 2016/17, Modi – government launched pilot projects for linking subsidy payment to manufacturers to sale of fertilizers to farmers by retailers in 18 districts spread over 12 states. From April, 2018, it was launched pan-India covering all 31 states and UTs.
Under the scheme, manufacturers receive 100% of the subsidy after fertilizer is delivered to the farmer and his identity viz. Aadhaar is captured on electronic PoS machine at dealer’s shop. Though, termed as direct benefit transfer [DBT], the nomenclature is misleading as subsidy continues to be routed through manufacturers.
The manufacturers sell urea at the maximum retail price [MRP] controlled by the centre at a low level and get subsidy reimbursement on unit-specific basis under the new pricing scheme [NPS]. The manufacturers of non-urea fertilizers are given ‘uniform’ subsidy [on per nutrient basis] under the nutrient based scheme [NBS]. However, since payments are adjusted to actual cost data, effectively, even subsidy to them is not uniform.
The government may not have actually implemented DBT of fertilizer subsidy to farmers but had not abandoned the idea. In fact, early this year, none other than NITI Aayog [in collaboration with The ministry of finance] was working on a road-map towards this goal. It was to put up a proposal to the new government [to take charge in May 2019] for approval.
Now, if abandonment of DBT to farmers is even crossing the mind of the official think-tank, there is need for deep introspection. Why are farmers not comfortable with the idea?
To get to the root cause, let us take an example. At present, the farmer pays Rs 268/- for a bag of urea [a bag contains 50 kg] as against cost of supply which is at least twice as much or Rs 536/- [it could be even higher depending on the manufacturer who supplies the material]. The difference is claimed by the manufacturer as subsidy from the government. Under this arrangement, from farmers’ perspective, the subsidy is embedded in the price [also termed as ‘subsidized’ price in common parlance].
Under DBT, the farmer will pay the higher cost-based price or Rs 536/- to the manufacturer and get subsidy of Rs 268/- in his bank account ‘directly’ from the government. Effectively, he will continue to shell out Rs 268/- only from his pocket as is the position under the existing dispensation. Yet, the switch-over makes a big difference as he will first have to pay the full price and thereafter only get the subsidy. This raises several concerns.
The very raison de atre for subsidizing fertilizers is that majority of the farmers are poor and can’t afford to pay higher price. Yet, if, he has to pay higher price, where will he get the extra money from? Who will plug the gap at the time of purchase? Will banks provide the funds? Will he get the money when needed [very crucial as fertilizer demand is seasonal]? Who will bear the interest cost? What if, he is forced to borrow from the money lender?
The government can ask public sector banks [PSBs] to give money to farmers well in advance – before commencement of the season – and also promise to reimburse the interest cost. But, this is easier said than done especially when farmers don’t have ready access to a bank branch. If, he is forced to fall back on the money lender [this is when he can’t get loan from the bank], this is the surest invitation to a debt trap as the latter charges exorbitant rate of interest.
But, this nightmare for the farmers can be avoided. All that the government needs to do is to transfer subsidy to their accounts in advance of the purchase. A typical bureaucrat may argue against giving subsidy in advance on the ground that the farmer may not use it for the intended purpose i.e. buying fertilizers.
The argument is specious. The assistance is given precisely for the purpose of helping the farmer buy fertilizers. It will be preposterous to doubt that he will misuse and divert it for some other purpose. Even so, it should be possible to conduct post-facto check to find out cases of misuse, if any [Aadhaar based authentication of purchase – digitally recorded – can help in the required verification], take appropriate legal action and deny him the benefit of subsidy in future.
It is also pertinent to mention here that during the initial years of operating the subsisting scheme of routing subsidy through the industry, bulk of the subsidy amount was released to manufacturers on ‘dispatch’ of the material from the factory. Subsequently, instead of dispatch, release of 95% of the subsidy to urea manufacturing units and 85% to complex manufacturers was linked to ‘sale of material in the district’ The balance 5%/15% for urea/complexes was paid on confirmation of sales to farmers by state government.
That arrangement was up to March 31, 2018 and continues even now in respect of a portion of sales – also known as ‘other than DBT’ – even as an overwhelming share of sales is on DBT [albeit official version] from April 1, 2018 onward.
The logic behind releasing bulk of the subsidy amount before actual sale to the farmers was to ensure that the manufacturers don’t face any liquidity crunch and are able to continue production. On the same logic, there is no reason why the government should not consider giving subsidy in advance to farmers under DBT. With this, it would have addressed a major concern of the farmers.
Yet, if there is no movement forward, the government itself is to the blame. The finance ministry is prone to providing much less funds for fertilizer subsidy than required [it does so to manipulate expenses to meet the target of fiscal deficit] leading to pile up of arrears. As on March 31, 2019, the arrears were Rs 39,000 crore and are estimated to increase to Rs 60,000 crore by March 31, 2020. As a result, manufacturers face serious liquidity problems and erosion in their profitability and even losses. This has even prompted the Fertiliser Association of India [FAI] to ask for decontrol of fertilizers and give subsidy directly to farmers.
Under DBT, the government will be forced to provide adequate allocation to meet all needs in full and ensure that no dues are kept pending. This will take away its flexibility to play around with numbers for achieving its fiscal goal. Hence, it is unable to muster courage to make a switch over to DBT to farmers.
In this backdrop, passing on the buck to farmers won’t pass muster. The government should implement this long-pending reform and make adequate budget provision to make ‘timely’ payment to farmers and ‘in full’. As regards its concern for reining in fiscal deficit, the very act of carrying out this reform will help address it by cutting misuse/diversion, wastage, inefficiency [germane to the existing dispensation] and corresponding reduction in subsidy payout.
The government should kick-start the process right now and start collecting farmers’ data viz. land size, crop grown, soil status, fertilizer use [this is necessary to determine the ‘eligible’ subsidy amount for each farmer which varies depending on the quantum of nutrient use of each type i.e. nitrogen (N); phosphate (P); potash (K) etc] and putting it all in digitalized record. While, compiling, care should be taken to exclude non-deserving farmers viz. those with land holding > 10 hectare or growing commercial crops.
It should create technology-driven financial architecture for hassle free transfer of subsidy to the farmers on ‘real time’ basis. The software should also provide for timely adjustment in the subsidy amount which will be required due to variations in prices of various inputs used in production of fertilizers.
Even as these preparations may take 2-3 years, the policy decision should be announced now to put all stakeholders viz. farmers, manufacturers, central government departments, states and others on advance notice and give them enough time to transit smoothly to the new dispensation.