The ministry of finance and NITI Aayog are working on a road-map for direct benefit transfer [DBT] of fertilizer subsidy to farmers. The data base being used for giving Rs 6000/- per year to 120 million small and marginal farmers under PM Kisan Samman Nidhi – to be extended to cover all farmers [as promised in BJP election manifesto] – will be used for this purpose. DBT on fertilizers plus support under PM-KISAN will be given as quasi–universal basic income transfer.
The proposal will be put up for consideration by the new government immediately after it takes charge. To begin with, this will be implemented on trial basis in select districts to cover small and marginal farmers only. However, full scale implementation of DBT – at all India level – will be possible in 2-3 years.
The idea is not new. It has been on the radar of the present government for quite some time and was also considered by the erstwhile UPA – dispensation.
In Budget for 2012-13, the then government had announced linking subsidy payment to manufacturers to the sale of fertilizers to farmers by retailers. Pilot projects in 10 districts spread over nine states were to be run; after successful implementation, DBT to farmers was to be launched in these districts from April 1, 2013. All-India launch was contemplated from April, 2014. The plan did not move beyond the drawing board.
In 2016/17, Modi – government launched pilot projects for linking subsidy payment to manufacturers to the sale of fertilizers to farmers by retailers in 18 districts spread over 12 states. From April, 2018, it was launched pan-India covering all 31 states and UTs.
Under the scheme, manufacturers receive 100% of the subsidy after fertilizer is delivered to the farmer and his identity viz. Aadhaar is captured on the electronic point of sale machine installed at dealer’s shop. Termed as direct benefit transfer [DBT], the nomenclature is misleading as instead of giving directly to the farmer, the subsidy continues to be routed through manufacturers.
The manufacturers sell urea at the maximum retail price [MRP] controlled by union government at a low level and get subsidy reimbursement on unit-specific basis under the new pricing scheme [NPS]. The manufacturers of non-urea fertilizers are given ‘uniform’ subsidy [on per nutrient basis] under the nutrient based scheme [NBS]. However, since payments are adjusted to actual cost data, effectively, even subsidy to them is not uniform.
The system protects inefficient and high cost units even as efficient and low cost units get no incentive to improve efficiency and reduce cost. Besides, the subsidy on urea being substantially higher than subsidy on non-urea fertilizers, this creates an imbalance in the retail prices in turn, leading to imbalance in NPK use ratio. Since, fertilizers are available at low price, all farmers – rich or poor, small or large, location/irrigated or rain-fed – get the benefit of subsidy.
The subsisting architecture has been in place for several decades and switch-over to the so called DBT from April 2018 has done nothing to alter it.
All this will undergo a metaphorical change when real DBT involving transfer of subsidy to farmers is introduced. Under real DBT, manufacturers will sell fertilizers to farmers at full cost/market-based price. The efficient/low cost units will get to increase their profits even as inefficient/high cost units will be forced to improve or down their shutters. This will also attract fresh investment giving a fillip to growth of the industry.
Further, since, no subsidized material will be available in the market, there won’t be any opportunity for arbitrage; hence no leakage/misuse. Moreover, unlike the present system wherein, the subsidy is cornered by all and sundry, the government will be able to restrict it only to the most deserving. Most importantly, farmers will be able to use subsidy for buying fertilizers that his soil/crop needs the most thereby helping reduce the imbalance in fertilizer use.
But, for the transition to be smooth and ensure that the arrangements are sustainable, a few crucial points need to be kept in mind.
First, apart from proper identification of farmers [those working under tenancy and sharecroppers must not be left out], the subsidy amount need to be capped unlike the existing dispensation wherein it is open-ended. The cap may be fixed at nutrient requirement for 2 hectare for every farmer irrespective of the holding size. To take care of variations, the eligible nutrient use per hectare may be determined with reference to the soil type, crop and agro-climatic zone. The subsidy per unit of nutrient can be calculated as per NBS.
Second, since fertilizer prices are prone to wide fluctuation due to heavy dependence on import [over 2/3rd in nitrogen, 90% phosphate and 100% in potash] there has to be a provision for adjustment in the subsidy amount to ensure that farmers are not out of pocket when the price is on an upward trajectory.
Third, under the existing arrangement, inadequate budget allocation year-after-year results in unpaid dues to manufacturers and resultant cash flow problems. They somehow continue operations even as their margins come under pressure. But, when, it comes to paying farmers, the government can’t afford to risk. It will have to make adequate provision in the budget and ensure that they receive subsidy in full and well in advance [before commencement of the season] so that they have the money to pay for the full/market-based price.
Fourth, the government should launch the scheme pan-India as partial introduction in some parts only could trigger diversion of subsidized fertilizers from areas [covered by subsisting dispensation] to areas brought under the new scheme.
Finally, the most important requirement for the scheme to take off and run successfully is ‘political will’. For now, this is missing as may be seen from the fact that since 2012-13 when a comprehensive action plan was initially mooted till date there has been no movement.
Will the new government have the gumption to act?