An official from the department of fertilizers is reported to have said that by putting 45 kg of urea in a bag, it is possible to achieve 10% saving in consumption. His logic is that farmer calculates requirements on per acre basis. He needs 90 kg which can be met with 2 bags of 45 kg each against current practice of using two bags of 50 kg each.
Are we to infer that until hitherto, 10% urea was going waste as he was forced to buy 100 kg – against need of 90 kg – and that loss will now be prevented with use of 45 kg bag? How come such an innovative idea did not strike policy makers earlier? A closer look at the official’s statement ‘moreover, 45 kg of neem coated urea is equivalent to normal 50 kg bag’ gives it a different twist.
So, it is neem coating that makes all the difference to efficiency of urea use and not how much a bag carries per se. The government had ordered mandatory neem coating of all urea [domestic plus imported] in 2015. Apart from efficiency gain, an overarching objective of this order was to stop diversion to chemical factories as neem coating renders it unusable for any purpose other than agriculture.
Of total urea sales 30 million tons [mt], diversion @30% is 9 mt. This implies that urea consumed by farmers is 21 mt as one cannot imagine diversion happening at their cost [it can only mean more import]. With diversion stopped [as claimed by prime minister and fertilizer minister ad infinitum], the government needs to arrange supply only for 21 mt. Factor in 10% efficiency gain due to neem coating, requirement should be even lower at 18.9 mt.
Taking domestic production 24.3 mt [2016-17], India would have a surplus of 5.4 mt annually. This implies that not only we ought not to be importing any urea, there should in fact, be substantial exports. Yet, during 2016-17 [April – January], India imported about 5.2 mt. There seems to be something amiss!
The claims in regard to stoppage of diversion and efficiency enhancement are exaggerated. Indeed, there is serious doubt on the former as (i) monitoring 600 million bags of urea for checking compliance for neem coating is impossible and (ii) MRP [maximum retail price] of urea is ridiculously low [1/4th to ½ of cost] which propels trader to indulge in diversion.
True, neem coating is a good measure and must be fully leveraged to get best results. But, it would be a grave error to surmise that this is a panacea for all ills afflicting fertilizers. To tackle them, there is an urgent need to overhaul the policy environment.
The government should take a view on whether it wants to continue with control on MRP of fertilizers. This is a legacy from past when in 1970s/80s control on retail price at low level was deemed necessary to encourage use. At the same time, producers were compensated for higher cost of production over this as subsidy to ensure their viability and reasonable return on investment.
These twin measures were intended to serve the overarching food security objective by increasing fertilizer use on one hand and increasing domestic production on the other so that farmers needs are met indigenously to the maximum extent. To boost consumption, all sorts of farmers viz. rich/poor, large/small were roped in by extending same price concession. To increase production front, all sorts of units irrespective of feedstock, technology, cost, efficiency etc were roped in by giving them differential price [albeit retention] support.
Now, India is self-sufficient in food [since 90s], but the above basics of pricing and subsidy [unique to fertilizer] have not changed. There is no justification for this to continue. The domestic industry is robust. It has the resilience to meet increasing demand and there is no compelling need to protect each and every unit [even if it is inefficient and high cost]. The fertilizer use is well entrenched across all segments and it makes no sense to retain price incentive for all farmers. Giving concession to poor farmers only should suffice.
The government should remove control on MRP and dismantle the extant subsidy regime that goes with it. This should be accompanied by freeing up urea import [free import of non-urea fertilizers is already permitted]. This will remove uncertainty of policy environment and make it attractive. This will attract huge investment including by foreign players. It will make India less vulnerable to imports.
Indian fertilizer industry is heavily dependent on import for its feedstock/raw material requirements viz. over 1/3rd for gas, 90% phosphate and 100% potash. Under a decontrolled regime, global players who have easy access to these materials can be roped in for their un-interrupted supply at competitive price – either under joint venture or any other mutually beneficial tie-ups.
Decontrol is a long pending demand of Fertilizer Association of India [FAI]. The FAI wants that subsidy should not be routed through manufacturers and instead given directly to farmers. This is also in sync with Modi – government commitment to direct benefit transfer [DBT] of fertilizer subsidy. But, DBT without these reforms is meaningless. In LPG – touted as a big success story – beneficiaries buy at full market price even as subsidy is credited to their account.
The existing system of fertilizer pricing is out of sync with GST. Under the new tax regime to come in force from July 1, 2017, fertilizers attract GST @12%. If, current system continues, tax will be levied on MRP which is barely 1/4th to ½ of production cost [2/3rd for complex fertilizers]. This will be grossly inadequate to set-off taxes already paid by fertilizer manufacturers on purchase of inputs.
Moreover, gas and electricity – major inputs used in fertilizer manufacture – are excluded from GST. Hence, their suppliers will not get credit for taxes paid on purchase of equipment/spares, services etc. This will push up cost of these inputs to fertilizer manufacturers who in addition, bear the brunt of VAT on gas [it can be as high as 21% in Uttar Pradesh] besides non-creditable electricity duty charged by states.
Clearly, the un-covered gap between taxes paid in fertilizer production and supply chain and tax on MRP will be huge. One wonders whether the government will reimburse this amount to producers/dealers as additional subsidy. On the other hand, under market based pricing and DBT of subsidy, this problem will be nipped in the bud.
Team Modi needs to shift gear. Instead of incremental changes [neem coating, bag size etc], it should go for big bang reforms. Why not use the opportunity offered by launch of GST!