Three years at the helm, prime minister, Modi has been in absolute command at delivering on good governance, dismantling archaic laws, streamlining processes, simplifying procedures, cutting bureaucratic red-tape, reforming institutions, using technology for ‘transparency’ in decisions and above all not letting an iota of corruption happen in any department. These far reaching changes will have a ‘profound’ and ‘sustainable’ impact on the way government does business with stakeholders from all sections of the society.
However, virtual absence of policy reforms especially in key sensitive areas such as fertilizers, food, power and oil which also happen to be resource guzzlers continues to be a matter of serious concern. These sectors suffer from structural weaknesses which will not go away merely by improving the quality of governance. There is an urgent need for a major overhaul yet, the government is dilly dallying.
Fertilizers
Fertilizers are struck by legacy of controls on pricing, production, import, distribution and sale. The control on maximum retail price [MRP] at low level results in huge subsidy pay-out as the cost of supply is higher. The manufacturers of urea [main source of nitrogen] are given subsidy on the basis of their unit-specific cost. As regards manufacturers of complex fertilizers [source of phosphate and potash], they get uniform subsidy; however, de facto, even this turns out to be unit-specific [courtesy, a host of control at execution level].
The government regulates import of urea; the total quantum is computed as the difference between assessed demand for each season [Kharif: April-September and Rabi: October-March] and supplies that can be arranged from domestic manufacturers. The designated agencies viz. Minerals and Metals Trading Corporation [MMTC], State Trading Corporation [STC], Indian Potash Limited [IPL] import from time to time as per instructions received from department of fertilizers [DoF]. There is subsidy on import too on cost plus basis.
In short, there is no competition among manufacturers. There is no competition between domestic suppliers and import either. The farmers are denied any opportunity to benefit from reduction in cost and increase in efficiency. The benefits of subsidy are misappropriated by large/rich farmers, chemical industries [even neighboring countries where low cost urea is smuggled] and manufacturers. The small/poor farmers gain a trifle 11% [Economic Survey 2015-16].
The price imbalance caused by disjointed policies [much higher subsidy on urea vis-à-vis complex fertilizers] is leading to imbalance in fertilizer use in turn, resulting in less crop yield, deterioration in soil quality and damage to the environment. The much touted efficiency gain due to neem coating pales in to insignificance when compared to loss caused by excessive use of urea.
There is nothing in offing to address the above policy distortions. However, in the budget for 2016-17, finance minister, Arun Jaitely announced direct benefit transfer [DBT] of fertilizer subsidy. DBT involves crediting subsidy directly in to the account of farmers. But, under trial runs currently underway in 11 districts, subsidy continues to be routed through manufacturers. If, the trial run is flawed then, how can actual launch deliver intended result?
Food
The food sector too suffers from excessive state intervention in the supply chain viz. ‘un-limited’ procurement at ever rising minimum support prices [MSP] [based mostly on political considerations], maintenance of excessive stocks [very often 2-3 times the buffer norms], selling food to millions of non-poor households [apart from poor] at artificially low prices and reimbursement of cost to state agencies towards handling, stocking and distribution on ‘actual’ devoid of any norms in regard to cost and efficiency.
The extant arrangements are not helping millions of surplus producing small farmers as procurement is mostly confined to richer/better-off farmers who also happen to forge clout with state administration and the bureaucracy. The latter are also the prime beneficiaries of increases in MSP even as small farmers get with much lower price realization selling their produce to private trade under duress.
These hit millions of marginal/subsistence farmers even harder as they do not produce enough to meet even their own consumption requirements and therefore depend on purchase from market at higher prices which follow ever increasing MSP. The condition of millions of landless is even more pitiable as they have no produce of their own and depend on market for all their requirements.
The option of sourcing their needs from public distribution system [PDS] where food is available at low prices is also very limited. As it is, entitlement per person is 5 kg per month which barely covers 50% of the requirement [10 kg per month estimated by NSSO (National Sample Survey Organization)]. The actual access is even less due to large-scale leakage from the system which on an average is about 50% and may even go up to 70% in some states.
The biggest pitfall of the extant dispensation is ballooning subsidy which rises in proportion to increase in MSP, quantum of procurement and cost of handling and storage. Further, the clamor for low price to consumers [under Food Security Act (FSA), these are currently at ridiculously low of Rs 1/2/3 per kg for coarse cereals, wheat & rice] ensures that subsidy is pushed up to un-sustainable levels.
Clearly, the existing system penalizes all stakeholders viz., millions of poor farmers, landless workers, poor consumers and tax payer [having to pay for high food subsidy bill]. The only gainers are rich/better-off farmers having clout with the establishment, corrupt bureaucrats/ politicians and dubious traders.
One is yet see any credible policy reform to address these problems. In early 2015, Shanta Kumar committee had recommended reduction in coverage under FSA from extant 67% to 40%, increase in entitlement of very poor from 5 kg under FSA to 7 kg and requiring all others to pay 50% of MSP to weed out better-off/rich from the purview of subsidy. The government is yet to act on these recommendations.
Power
The power sector is afflicted by galloping losses of state electricity boards/power distribution companies [SEBs/PDCs]. These in turn, arise due to supplies at heavily subsidized price to households and farmers [in some states, it is even free] and large-scale power theft. To salvage SEBs/PDCs, the center/states come up with financial restructuring package [FRP] – a euphemism for take-over of former’s debt. Three such FRPs have been granted since 2000. The policy reforms – those aim at reducing subsidized supply, reining in power theft etc – have remained un-implemented.
Oil
In oil, while some progress was made by way of removal of government control on price of petrol [2010] and diesel [2014] and DBT of LPG subsidy [January, 2015], freedom of retailing these products and hence, scope for competition is miles away. Besides, a large portion of LPG subsidy continues to accrue to better-off/rich.
Modi not only has an overwhelming mandate of the public but also the much required ‘boldness’ and ‘decisiveness’ to reform the subsidy regime. Yet, if action is missing, one can only blame it on his ‘helplessness’ when it comes to politically sensitive areas especially fertilizers, food, power and oil.