According to report in a leading economic daily [citing an official involved in policy making], “the government is likely to fix nutrient-based subsidy [NBS] rate for urea before rolling out the direct cash transfer [DCT] of urea subsidy to farmers’ accounts. The subsidy – fixed on per hectare – will not be universal for farmers across the country and will be based on soil health and size of the landholding. Tenant farmers would also be eligible to get the subsidy on production of valid tenancy documents.
To assess the implications, let us first take a look at the existing dispensation of subsidy on urea and non-urea or phosphate [P] and potash [K] fertilizers and how the two differ. How will a change in the former to align with the latter help? We also need to see the existing mechanism of disbursing subsidy.
The manufacturers sell urea at the maximum retail price [MRP] controlled by the centre at a low level unrelated to the cost of production which is much higher. The current MRP is Rs 268/- for a bag of urea [a bag contains 50 kg] as against cost of supply which is at least twice as much or Rs 536/- and even higher depending on the manufacturing unit from where the supply is made. The excess of cost over MRP is reimbursed as subsidy on unit-specific basis under the new pricing scheme [NPS] in vogue since 2003. In case of P&K fertilizers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme [NBS].
The cost of transportation [it includes primary movement by rails from the plant and secondary movement from the unloading rake point by road to the retailer] is reimbursed to urea manufacturers under a uniform freight policy. On the other hand, manufacturers of P&K fertilizers [excluding single super phosphate (SSP)] get reimbursement of freight cost only towards primary movement on the basis of actual rail freight, as per the railway receipts.
In case of P&K fertilizers, even as the government normally keeps the subsidy unchanged, increase in the cost leads to ever increasing MRP. The subsidy is about 25%-30% of the supply cost of these fertilizers. In sharp contrast, it keeps MRP of urea at a low level [the current price Rs 268 per bag is more or less the same as it was nearly two decades ago] even as all cost escalations are absorbed by increase in subsidy. For urea, the subsidy is about 50%-75% of the cost. As a result, MRP of urea is much lower than MRP of P&K fertilizers prompting farmers to use more of the former and less of latter.
The discrimination against P&K fertilizers is also evident in their not getting freight subsidy on secondary movement to retail point [manufacturers of SSP don’t even get primary freight for movement from plant to railhead] as also in denial of natural gas – the feedstock used for making of ammonia – an intermediate used in manufacture of P&K fertilizers – to their plants.
These disjointed policies are at the root of increasing imbalance in NPK use ratio, declining crop yield, deterioration in soil health and adverse impact on the environment.
Coming to the mechanism for subsidy disbursement, at present, all fertilizer manufacturers receive 100% of subsidy after the product is delivered to the farmer and his identity viz. Aadhaar is captured on electronic PoS machine at dealer’s shop. Termed direct benefit transfer [DBT], the nomenclature is misleading as subsidy continues to be routed through manufacturers, as earlier.
The introduction of NBS for urea on the same lines as for existing scheme for P&K fertilizers would mean that every manufacturer will get the same subsidy Rs per unit of nitrogen [N] say, ‘X’ [urea contains 46% ‘N’ implying subsidy on 50 kg bag will be 23X]. This will be a drastic shift from the existing dispensation wherein each unit gets subsidy specific to it. It will force high cost units to improve efficiency and reduce cost [to remain viable] and reward low cost units by helping them improve their profitability. To see how things will pan out, let us consider this.
The current MRP is Rs 5360 per ton. Let us take unit ‘A’ whose cost of supply is Rs 10,000 per ton and unit ‘B’ whose cost is Rs 20,000 per ton. At present, ‘A’ gets Rs 4640 per ton [10,000-5360] as subsidy whereas, ‘B’ gets Rs 14,640 per ton [20,000-5360]. Under NBS, both will get the same subsidy say, Rs 9640 per ton implying that each will get cost recovery of Rs 15,000 per ton [5360+9640]. As a result, ‘A’ will gain by Rs 5000 per tone [15,000-10,000] whereas ‘B’ will lose Rs 5000 per ton [20,000-15,000]. The latter will either have to improve to stay in business [or shut shop] even as former is rewarded.
However, the government will have to ensure that external factors impinge ‘uniformly’ on all units. In 2015, it had introduced a system of pooling domestic and imported gas to ensure its supply to all units is at a uniform price [gas is the main feedstock/fuel used in production of urea]. Yet, the delivered price at factory tap varies. This is because gas is at present ‘zero rated’ under GST [Goods and Services Tax] implying that it continues to be covered by erstwhile dispensation of excise duty [ED] and value added tax [VAT].
Even as ED on gas is ‘nil’, VAT varies from state to state with a low of 5% in Rajasthan and high 21% in Uttar Pradesh [UP]. If, the status quo continues then under NBS, a unit located in UP will be unduly penalized whereas the unit in Rajasthan will get fortuitous gain. Hence, the current zero rate tag on gas needs to go and GST levied at appropriate level [say @5% which is also the GST applicable on all fertilizers]. This will ensure that all urea units are uniformly affected.
Under NBS, even as subsidy is fixed, manufacturers will be free to fix MRP of urea though the government will have checks in place to ensure that they pass on the subsidy in full to farmers [as in P&K fertilizers]. It will need to fix subsidy at a level so that MRP is lifted from the current low of Rs 5360 per ton to a level required to discourage use of urea. Along with increase in subsidy on P&K fertilizers, this should help correct the imbalance in fertilizer use.
It should be clear in no uncertain terms that ‘uniform’ subsidy on one hand and galvanizing MRP to a ‘realistic’ level on the other, both are needed to achieve the desired objectives. While, the former is needed to foster competition among manufacturers, the latter is to address the existing imbalance in the price of urea vis-à-vis the price of P&K fertilizers. Besides, P&K should also be brought under a uniform freight policy [including both primary and secondary transportation] as is applicable to urea.
As regards giving subsidy to farmers [albeit on per hectare basis] depending on soil health and landholding size, the intent appears to be to fix the eligible quantity of urea for subsidy. However, the eligible quantity should cover all subsidized fertilizers [including P&K] and not limited to urea alone.
The government should also consider capping subsidized supply to cover fertilizer requirement for up to 2 hectares only [unlike the present dispensation under which a farmer can buy any quantity without any ceiling]. But, that is fraught with problems of implementation as then, there will have to be two sets of prices viz. subsidized and the other un-subsidized/full cost based, the former for consumption up to 2 hectares and the latter for requirement > 2 hectares. In such a scenario, diversion/leakages are inevitable
For better targeting and avoiding diversion/leakage, the subsidy should be transferred directly to the account of farmers. The government may decide on a fixed amount per hectare for different agro-climatic zones and likely nutrient requirements in each zone. Further, the subsidy should be restricted to a maximum of 2 hectare.
Instead of half baked moves [read: NBS etc], Modi should go for holistic reforms viz. removal of all controls on fertilizers and government’s intervention limited to direct cash transfer [DCT] to small and marginal farmers [landholding size < 2 hectare] only.