Addressing the ET Global Business Summit, prime minister, Modi for the first time ever, shared at length his thinking on subsidies. The relevant excerpts are reproduced below:-
“We have to eliminate bad subsidies, whether or not they are called subsidies. But, some subsidies may be necessary to protect the poor and the needy and give them a fair chance to succeed. Hence, my aim is not to eliminate subsidies but to rationalize and target them.
I have been referring to cooking gas, fertilizer and kerosene subsidies. I must confess that I am surprised by the way words are used by experts on this matter. When a benefit is given to farmers or to the poor, experts and government officers normally call it a subsidy. However, I find that if a benefit is given to industry or commerce, it is usually called an “incentive” or a “subvention”. We must ask ourselves whether this difference in language also reflects a difference in our attitude?
Why is it that subsidies going to the well-off are portrayed in a positive manner? The total revenue loss from incentives to corporate tax payers was over Rs 62,000 crore. Dividends and long term capital gains on shares traded in stock exchanges are totally exempt from income tax even though it is not the poor who earn them. Since it is exempt, it is not even counted in the Rs 62,000 crore. Double taxation avoidance treaties have in some cases resulted in double non-taxation. This also is not counted in the Rs 62,000 crore.
Yet, these are rarely referred to by those who seek reduction of subsidies. Perhaps these are seen as incentives for investment. I wonder whether, if the fertilizer subsidy is re-named as “incentive for agricultural production”, some experts will view it differently.”
Modiji has clearly brought to the centre-stage the lingering issue of “perception” that was never a part of debate/discussion on subsidies and yet, it had been the under-current in policy formulation by bureaucrats leading to a number of adverse changes. Just because subsidies by their very nomenclature are perceived to be bad, in case of fertilizers a number of adverse policies were implemented during the last two-and-a-half decade or so.
Some of the policy changes that were made without even analyzing the causes behind increase in subsidy and assessing their consequences are sudden decontrol of phosphate [P] and potash [K] fertilizers in 1992; continued control on maximum retail price [MRP] of urea at low level; progressive tightening of pricing norms under administered pricing scheme for urea – called retention pricing scheme [RPS] until 2003 and new pricing scheme [NPS] thereafter and too much of control and micro-management of nutrient based scheme [NBS] for P&K fertilizers in vogue since 2010.
None of the aforementioned policy changes has helped in making a dent on fertilizer subsidy which continues to rise and yet these have affected the health and growth of this industry. No fresh investment has been made in the industry in the past close to two decades. These have seriously hampered the ability of manufacturers to survive, forget making reasonable return on investment. So much so, even reputed business houses such as Tatas and Birlas were forced to announce plans for exiting fertilizer.
Therefore, prime minister is absolutely right when he said “if fertilizer subsidy is re-named as ‘incentive for agricultural production’, some experts will view it differently”. To extrapolate the logic of his argument further if then, government officials also start looking at it differently [a more apt phrase is ‘objectively’], it would be possible to avoid adverse policy re-orientations. That will be good for all stakeholders.
Other the battle of perception, Modi has emphasized the need for ‘rationalizing’ and ‘targeting’ the subsidies. The best way to achieve this is to introduce direct benefit transfer [DBT] to replace the extant system of routing subsidy through fertilizer manufacturers. While, DBT has achieved wonders in LPG where it is already in operation for more than an year, in kerosene where it is proposed to be launched in April, 2016 in 26 districts, he narrated its benefits.
While, all this is fine, there is dire need for introducing DBT in fertilizers without any further delay. This is because under extant dispensation, there are blatant misuses of subsidy which are also bringing a bad name apart from the misconception emanating from the ‘subsidy’ tag associated with this benefit. So, what are the misuses?
First, due to control on MRP of urea at a ridiculously low level, there is a strong incentive to divert the subsidized urea for industrial use or smuggle to neighbouring countries where prices are much higher due to absence of subsidy support. According to an estimate, about 30% of urea meant for agriculture is pilfered. This translates to a loss of about Rs 15,000 crores annually to the exchequer.
True, neem coating of urea will help check diversion by making it unsuitable for use in chemical industries. But, given the huge differential between the subsidized price and full cost based/market price, dubious players will find some way to circumvent the mandatory provision of neem coating. On the other hand, DBT alone provides a foolproof mechanism for eliminating pilferage as under it, all urea will be sold at the market price.
Second, the low MRP is leading to excessive and indiscriminate use of urea. This in turn, leads to inefficient and imbalanced fertilizer use. Only one third of applied nitrogen [N] is picked up by plants even as one-third seeps in to water and remaining one-third evaporates. Imbalance in NPK use ratio [due to much higher price of P&K fertilizers vis-a-vis N] is affecting soil health, crop yield and environment.
Third, the existing system is shielding some high cost urea manufacturing units even as low cost and efficient units have no incentive for their better performance. This together with delayed payment of subsidy dues has come in the way of boosting domestic production. High cost urea imports leading to much higher subsidy outgo [which benefits exporters from other countries] is yet another big negative of routing subsidy through suppliers/manufacturers.
Fourth, an over-arching impression that all increases in cost will be reimbursed as additional subsidy by the government under NPS [though fertilizer manufacturers actually do not get it often or get only partial compensation] makes the suppliers of inputs/raw materials and even states tendentious to increase prices and taxes. Under DBT dispensation, such tendencies would be nipped in the bud.
In view of above, the government must not delay launching of DBT for fertilizer subsidy. As regards exemptions for the industry, finance minister has already announced a road-map for phasing these out along side reduction in tax rates.