Under the “Stimulus – III” unveiled on November 12, 2020, the union finance minister, Nirmala Sitharaman made an unprecedented announcement of releasing an additional Rs 65,000 crore towards fertilizers subsidy over and above Rs 71,000 crore allocated in the budget for 2020-21. For an industry used to not getting thousands of crores in subsidy dues year-after-year for several decades in the past, this has come as a big bonanza in as much as the amount will help in clearing almost all of their pending dues.
But, the Fertilizer Association of India (FAI) – an umbrella organization of fertilizer manufacturers – is reading a lot more into this decision. It is seeing this as a precursor to structural reforms in this sector including a gradual transition to direct cash or benefit transfer (DBT) of subsidy to farmers and capping purchase of subsidized fertilizers. But, nothing of that sort is going to happen.
In the Budget for 2012-13, the then UPA government had announced tracking the movement of fertilizers from retailers to farmers, and linking part of subsidy payment to manufacturers for sale of fertilizers to farmers by retailers. In the mid-year economic analysis of 2012-13, the finance ministry came out with a blueprint on modalities for implementing the Budget announcement. Pilot projects in 10 districts spread over nine states were to be launched; to be followed by DBT in these districts from April 1, 2013. Concurrently, the government planned to track fertilizers movement in the whole country. This was to be followed by launch of DBT pan-India from April, 2014.
Even as the Department of Fertilizers (DoF) developed the technology infrastructure (in particular, a mobile and a web application nicknamed e-Fertilizer Monitoring System that provides information on stock, sale and receipt of fertilizers till the last retail point) to execute the blue-print, the DBT remained on paper.
Meanwhile, the NDA – government under Narendra Modi recognized that there was rampant misuse of subsidy. According to the Economic Survey 2015-16, as much as 24% of the subsidy is spent on inefficient producers, 41% is diverted to non-agricultural uses including smuggling to neighboring countries, and 24% is consumed by larger, presumably richer farmers. That leaves a tiny 11% for small and marginal farmers who alone, according to Modi, should have been the sole beneficiaries of subsidy. The Survey advocated DBT using the JAM (Jan Dhan-Aadhaar-Mobile) platform.
While, presenting the Budget for 2016-17, the then finance minister, Arun Jaitley stated, “we have already introduced a direct benefit transfer in LPG. Based on this successful experience, we propose to introduce DBT on a pilot basis for fertilizer in a few districts in the country, with a view to improving the quality of service delivery to the farmers.” Accordingly, in that year, Modi – government launched pilot projects for linking subsidy payments to producers, to the sale of fertilizers to farmers by retailers in 18 districts spread over 12 states. It was launched across the country in March 2018.
Under the scheme, the government made disbursal of 100% of the subsidy to producers conditional upon actual sales to farmers and these getting registered on point-of-sale (PoS) machines at dealer’s shop (prior to this, they were getting 95% of subsidy ‘on receipt of material at a district’s railhead point or approved godown’ and balance 5% on confirmation of sales to farmers by states). But, this is not DBT as subsidy continues to be routed through manufacturers.
Despite tall claims made by both UPA and NDA dispensations since 2012, DBT to farmers has remained on paper. And, there is nothing to suggest that this will happen anytime soon. Just because the government has cleared all subsidy dues to the manufacturers gives hardly any clue to impending change. In fact, it has not bothered to clear any of the road blocks lying on the way. To understand these road blocks, let us look at how the extant system works.
The Centre controls the maximum retail price (MRP) of urea at a low level, unrelated to the cost of production and distribution which is higher. It reimburses the manufacturers for the shortfall as subsidy on a ‘unit-specific’ basis under the new pricing scheme (NPS). The current MRP of urea is ridiculously low at Rs 5360 per ton even as the cost can vary from about Rs 15,000 per ton to Rs 25,000 per ton. The unique thing here is that even as all manufacturing units (there are a total of 31) sell urea at the same price, each one of them gets paid on the basis of its own production cost. Thus, an efficient unit producing at say, Rs 15,000 per ton gets subsidy of Rs 9640 per ton (15,000-5360) whereas another producing at Rs 25,000 per ton, gets subsidy of Rs 19,640 per ton (25,000-5360).
In the case of P and K fertilizers, the government gives ‘uniform’ subsidy on per nutrient basis to all manufacturers under the Nutrient Based Subsidy (NBS) Scheme. For arriving at MRP, they are expected to deduct the subsidy amount from the cost. For instance, if a unit produces DAP (dia-ammonium phosphate) at a cost of say Rs 34,000 per ton and subsidy is Rs 10,000 per ton then, it will have to fix MRP at Rs 24,000 per ton (34,000-10,000).
Now, if instead of routing through the manufacturers, the subsidy is to be given directly to farmers, the transition in case of P&K fertilizers may not face much hurdle. The subsidy of Rs 10,000 per ton or Rs 500 per bag (50 kg) of DAP can be credited to farmers’ account even as the manufacturer will sell at the market based price say Rs 1700 per bag (corresponding to Rs 34,000 per ton, this could either be the cost of most efficient producer or an average of all depending on how the market dynamics evolves). Under this scenario, the farmer will have to spend Rs 500 per bag extra at the time of purchase, though he will get back this amount from the government as subsidy later.
In the urea segment however, the transition will be tough for manufacturers (albeit high cost) as well as farmers. For producers, since each one of them will have to sell at the market based price, all those having production cost higher than the cost of most efficient producer or industry average, will either have to perform or wind up. As for the farmer, he will have to spend at the time of purchase, at least thrice (based on the market price of Rs 750 per bag corresponding to Rs 15,000 per ton) of what he is spending now.
The government has fears on both counts. On production front, there are a number of public sector plants which fall in high cost zone and hence risk being put on the chopper under DBT to farmers. Even the revival projects viz Sindri, Gorakhpur, Barauni etc, on completion (2021) will have production cost of over Rs 30,000 per ton; hence won’t be viable under market based pricing. As for farmers, it risks inviting their wrath if subsidy money does not reach them in time – inevitable if the budgetary allocation is inadequate (a scenario that has existed all through sans 2020-21)
There are two other barriers. One, under the present system of urea MRP at throwaway Rs 5360 per ton at a mere 1/4th of the cost, dubious operators make quick buck by diverting it to chemical industries or smuggling to neighboring countries; needless to say, this booty is shared with those in the position of power. Two, under present controlled regime, urea imports are canalized through state agencies viz. Minerals and Metals Trading Corporation (MMTC), State Trading Corporation (STC) etc and there is a lot to gain (albeit at a personal level) for those who take crucial decisions. Clearly, there are vested interests in continuing with the status quo.
Unless these 4 big stumbling blocks – two explicit and other two not so explicit – are addressed, the transition to DBT to farmers will be next to impossible. But, all of this is doable.
Why can’t Modi get over his obsession with development of eastern India (Sindri, Gorakhpur, Barauni are all in that region) per se and instead, allow only those manufacturing units which are efficient and low cost? Why can’t adequate allocation be made for subsidy? Why should he not take a call on DBT which at one stroke of the pen, will put an end to urea diversion and save over Rs 15,000 crore annually in subsidy? Finally, why can’t he free up urea import?
Meanwhile, the government should garner data on all 140 million farm households and put it all on a web portal. This is an absolute must to ensure that no one is left out. At present, there are voids as even under PM KISAN, just about 80 million farmers are receiving the eligible amount Rs 6000/-. Under a business as usual scenario, leaving out 60 million from subsidy payment could be catastrophic.
The subsidy should be given on per hectare basis as recommended by the Commission for Agriculture Costs and Prices (CACP) (in its rabi report for 2021-22 marketing year, it has proposed subsidy of Rs 5000/-per year to be given in two tranches of Rs 2500/- each in kharif and rabi seasons). But, this should be given only to the small and marginal farmers i.e. those with land holding size less than 2 hectares. This will be targeting of subsidy in true sense of the term and also in sync with Modi’s philosophy of restricting state assistance to the poor.