For decades, successive governments have grappled with large-scale diversion, hoarding and black marketing of urea – a widely used fertilizer that constitutes nearly half of India’s total fertilizer consumption. According to an estimate, the scale of diversion and black marketing could be as high as 30%. Taking annual subsidy on urea to be about Rs 45,000 – 50,000 crore, this would mean that Rs 13,500 – 15,000 crore of tax payers’ money is being guzzled by dubious operators in the urea supply chain.
For long, this problem was swept under the carpet until such time, prime minister Narendra Modi brought it to the centre-stage within an year of his assuming office in May 2014. During the last 5 years or so, his government has taken several steps to address it – the most recent being a plan unveiled by the Centre to cap the number of subsidized fertilizer bags that individual farmers can buy in any cropping season and requiring them to buy quantity in excess of this if any, at the un-subsidized price.
Ironically, none of the measures earlier implemented by the government worked and it is unlikely that the latest salvo will make any dent. Let us recap the major ones and their outcome.
In early 2016; addressing a rally in Tamil Nadu, Modi had said, “Urea was being sold in the black market and farmers had to bribe officials to get their quota of urea. My government put an end to the practice of corruption in the sale of urea. We have started distributing neem-coated urea which helped farmers bring down their cost of production as well as the quantity of chemicals used in farm operations”.
In the previous year, the government had issued an order mandating all manufacturers/importers to neem-coat all of the urea supplies. PM’s logic was simple. Upon neem coating, urea is rendered unfit for use in any industry; hence the manufacturers/distributors/dealers will have no other option but to sell it only to farmers. But, things did not pan out the way he wished. Had it been so, urea consumption (for records, sales is taken as consumption) and correspondingly subsidy would have shown a substantial reduction.
But, that was not to be as consumption during 2019-20 was about 33 million tons against 30 million tons during 2015-16. The government could have got the intended result but only if coating was actually done. That is where the rub lies. Someone needs to do policing of a humongous 600 million bags of 50 kg each (corresponding to 30 million tons). That is well-nigh impossible.
In March 2018, Modi – government made disbursal of subsidy to manufacturers conditional upon actual sales to farmers and these getting registered on point-of- sale (POS) machines. Prior to this, they were getting 95% of the 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. This meant that from railhead/godown, the material could be siphoned off to industries in large quantities. The change should help rein in this “wholesale diversion”
This too has not yielded the desired result. The officials in the department of fertilizers (DoF) suspect that diversion continues to take place at the retail level. They argue, currently, anybody can buy any quantity of fertilizer through POS machines (all that he needs to do is to furnish Aadhaar unique identity number). This makes the system susceptible to misuse as even a non-farmer can buy subsidized urea and then, sell to industries at high price.
In August this year, the Union government tried another measure; this time it decided to restrict purchase of urea to 100 bags from 999 bags per transaction by one purchaser. In a letter dated August 27, 2020 addressed to state chief secretaries, the secretary, DoF sought their opinions on ‘how many such transactions should be allowed per month to each purchaser’. He also asked states ‘to identify top 20 urea purchasers in each of their respective districts in 22 major fertilizer-consuming states’.
The intent behind this move was to find out whether the big distributors are cornering quantities in excess of what is required (albeit for agricultural use) and punish the errant guys. The Fertiliser (Control) Order, 1985, under the Essential Commodities Act (ECA) gives the government powers to book any dealer indulging in sales to bulk buyers instead of selling to genuine farmers.
Meanwhile, to deal with leakages at the retail level, the Centre has opened another front by imposing a ceiling on the number of bags a farmer can buy at the subsidized price for the whole season (this will be decided keeping in mind land area, crops grown etc). The moment a farmer hits this ceiling, the PoS machine will stop registering the extra bags. If, the farmer still wants to buy extra, those bags will be available only at the non-subsidized price.
It is early days and any observation might be construed as being premature. Prima facie, this is an idea which may not even take off. The authorities are wanting to micro-manage a humongous about 230,000 fertilizer dealers (besides thousands of big distributors) and over 140 million farmers. This is next to impossible. The violators will always find ways to circumvent the regulations. Besides, this will open a gateway to corruption at every level.
Be it neem coating, mechanism for disbursing subsidy, checking for leakages at the wholesale or retail (or even at farmers’) level, these are all administrative measures whereas the problem lies at the level of policy making. It has to do with the Centre’s control on maximum retail price (MRP) of urea at a low level unrelated to the costs of production and distribution, which is much higher. The excess cost over MRP is reimbursed to the manufacturer as subsidy. The cost of movement from factory to the retail point is also reimbursed.
Even as production cost has increased in leaps and bounds, the government has kept MRP frozen. The current MRP is ridiculously low at Rs 5,360 per tonne or $71 per tonne (at current exchange rate). The average production cost from gas-based plants is more than four times, at about $320 per tonne, and the cost of import is about $300 per tonne. The price in neighboring countries such as Nepal, Bangladesh, etc, is also high in the $250-300 per tonne range. This scenario is very tempting for industrial users in India and even for farmers in our neighboring countries.
When industries can access ‘subsidized’ urea at 1/4th the market price, why would they not grab it? Why would traders not divert to them the supplies meant for farmers? Why would the farmers (even genuine) not be tempted to indulge in trading?
It is this flawed system of administering subsidy, i.e., routing it through the manufacturers and keeping a huge gap between the MRP and the cost by pegging the former at an artificially low level that is at the root of diversion & black marketing of urea.
The way forward is to end control of the MRP of urea, allow manufacturers the freedom to fix retail prices based on the market forces, and remove movement and distribution control. As for helping farmers, the subsidy should be directly credited to their bank account or direct benefit transfer (DBT) as it is known in common parlance. When urea at throwaway price is not available—and thus, there is no arbitrage opportunity—the scope for diversion will end too.
This will also yield a host of other benefits, such as an increase in efficiency and cost reduction across the entire supply chain, innovation by the industry to make better and customized solutions to meet farmers’ diverse needs, increase in efficiency of fertilizer use (all these are germane to letting competition work), and, above all, reduction in the subsidy outgo.
The government must recognize this flaw in the existing policy, decontrol urea and introduce DBT.