Direct transfer of fertilizer subsidy – 12 commandments

Direct benefit transfer [DBT] of fertilizer subsidy offers huge benefits viz., rational allocation of resources, reduction of imbalance in NPK use, prevention of pilferage/black-marketing and saving in subsidy. Even as Modi – government is committed to introduce DBT, it would do well to seriously consider following 12 commandments:-

(i) It must be made abundantly clear to all stakeholders that the day DBT is introduced, the present system of routing subsidy through fertilizer manufacturers will go. The new pricing scheme [NPS] for urea under which they are paid subsidy will be dismantled. Likewise, the nutrient based scheme [NBS] under which manufacturers of P&K fertilizers are paid subsidy will have to go.

(ii) All manufacturers of urea and P&K fertilizers will sell their products at full cost based/market determined price. Unlike the extant NPS wherein unit-specific subsidy takes care of unit-specific production cost [both high and low are reimbursed at their respective level], under market-based regime, their price realization will be more or less uniform. The high cost units will have to adjust i.e. reduce cost to stay afloat or wind up.

(iii) Imported urea which under existing dispensation gets full protection by way of subsidy support [excess of landed cost, transport and distribution over controlled selling price] will have to compete with domestic urea. At present, urea import is canalized through designated state trading enterprises such as Minerals and Metals Trading Corporation [MMTC], State Trading Corporation [STC] and Indian Potash Limited [IPL]. Ideally, the government should de-canalize and make import free by any one so that full benefits of competition can accrue.

(iv) A number of high cost urea manufacturing units are under public sector undertakings [PSUs] viz., Fertilizer Corporation of India Limited [FCIL], Brahmaputra Valley Fertilizer Corporation of India Limited [BVFCIL], Madras Fertilizers Limited [MFL] etc. Some of them are lying closed for many years while others are making losses. Under market-based pricing, given their present cost structure and considering that the unit-specific support [currently given under NPS] will no longer be available, the losses of loss making units will increase and chances of reviving closed units will become dim. Therefore, the government will have to think through ‘special package’ for them to remain viable.

(v) At present 50% of urea production and 20% of P&K fertilizers are subject to movement and distribution controls. The freight cost is separately reimbursed as subsidy to the manufacturers. Under DBT dispensation, these controls and freight subsidy will have to go even as the cost of moving fertilizers to consumption points has to be reflected in selling price.

(vi) The industry will have to be put on advance notice. The government should make an announcement now [this can be made in budget for 2016-17] that DBT will come in to force 3 years hence i.e. from April, 2019. This will enable manufacturers and other stakeholders such as distributors and retailers etc to adjust and come to terms with the new dispensation. The government will also need to ensure that infrastructure for supply of gas [especially pipeline network] to all fertilizer plants is in place for a level playing field.

(vii) Under existing system, the fertilizer dealer picks up material at subsidized price and sells to farmer after adding his margin. Under DBT, he will have to pay full market-based price. This being substantially higher than the current [subsidized] price, he will need to deploy that much extra working capital [WC]. To enable dealers smoothly transit to the new scenario, the availability of institutional credit will have to be increased to make required WC available.

(viii) At present, farmers pay subsidized price for all fertilizers. Under DBT, they will have to pay much higher market-based price even as subsidy is credited to their bank account. The amount will be determined as subsidy in Rs per unit of ‘N’, ‘P’ & ‘K’ multiplied by the quantum of nutrient use per hectare. The government will have to make fool proof arrangements to ensure that subsidy reaches their account well in advance to enable timely purchase. Any delay in crediting money to their account could be catastrophic as subsidy accounts for a major share of market price and without it majority of poor farmers cannot make purchases.

(ix) When, cash is given to beneficiary farmers [instead of supplying fertilizers at subsidized price as is done now], there is always a risk of money being used for other purposes. If that happens then, the very objective of DBT will be defeated. To guard against this, the government should consider transferring subsidy to the account of woman in the farmer’s family who is expected to be much more responsible.

(x) The market-based prices will be prone to wide fluctuation all the more because of high import dependence in all fertilizer segments which is nearly 60% in nitrogen, over 90% in phosphate and 100% in potash. This will require frequent adjustment in subsidy amount and timely transfer to farmer’s account to ensure that the net payout from his pocket remains ‘low’ and ‘stable’.

(xi) Presently, outstanding subsidy dues to manufacturers running in to thousands of crores are a routine affair. They somehow manage by extra borrowings from banks or issue of bonds by government against subsidy receivables. To let this happen under DBT would be disastrous. The government will have to make adequate provision in the budget and ensure that no dues are pending to farmers.

(xii) Finally, the government will have to identify all farm households and their beneficiary owners. These will be persons who are actually cultivating the land [they could be owner/cultivators or tenants/share croppers]. It will ensure that all have bank accounts duly authenticated with Aadhaar card. The entire exercise must be completed by March, 2019.

Both the central and state governments will have to carefully orchestrate their machinery and infrastructure – administrative, financial, IT [information technology] and institutional – for strict observance of all 12 commandments to ensure there are no lapses and DBT has a smooth run.