Considering the crucial role played by fertilizers in increasing food production and the overarching need to make it affordable to farmers, the union government has followed a policy of controlling their maximum retail price [MRP] at a low level unrelated to their cost of production and distribution which is higher. To ensure that production is viable at this price, it gives subsidy to the manufacturer to reimburse the difference between the two. The amount of reimbursement is known as subsidy.
In case of urea, the subsidy varies from unit to unit and is administered under the New Pricing Scheme [NPS] whereas for decontrolled complex fertilizers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme [NBS]. Since, this is subject to submission of cost data by individual units and necessary adjustment in subsidy thereof, de facto even this turns out to be unit-specific.
Prior to Rabi 2017-18 [October 2017 – March 2018], 95% of the subsidy to urea manufacturing units and 85% to complex manufacturers was released on sale of material in the district. The balance 5%/15% for urea/complexes was paid on confirmation of sales to farmers by the state government.
The arrangements are beset with maladies viz. diversion of subsidized fertilizers [estimated to be a high of about 30% in case of urea] to chemical industries and smuggling to neighboring countries where prevailing fertilizer prices are higher [courtesy no subsidy]; delayed payment of subsidy to manufacturers; lack of pressure on the producers to reduce cost and excessive dependence on imports.
Beginning October 2017, the government affected a major change in the mechanism of subsidy payment. Under the new system viz. direct benefit transfer [DBT], 100 percent of the subsidy is credited into the bank account of the fertilizer manufacturer on the basis of actual sales made by the retailers to the farmers. This is done after the beneficiary/farmer authenticates the purchase with Aadhaar card or any other document viz. Kisan credit card – through a point-of-sale [PoS] device placed with the retailer.
After a modest start with Delhi in October, 2017, by March 31, 2018, all fertilizer sale outlets in 31 states/UTs had installed ePoS devices linked to Aadhaar. From April, 2018, subsidy payments all over India are being made under DBT. According to the department of fertilizers [DoF], during April-July 2018, about 15.55 million tonnes of fertilizers were sold under the DBT scheme.
The moot question is whether the new dispensation will make a dent on the aforementioned problems.
True, with Aadhaar based authentication of each sale/purchase at the retailer level backed by tracking of physical movement under a mobile Fertilizer Monitoring System [m-FMS] [launched in 2013-14, this provides information on stock position, sale and receipt of fertilizers till the last retail point], there is much higher level of accountability on all stakeholders in the supply chain viz. manufacturers, wholesalers and retailers. It also brings about greater transparency in operations.
The system also bypasses the state authorities in as much as it does not require their prior approval before the balance subsidy payments [5%/15% for urea/complexes] are released to the manufacturers. In the past, the latter used to face considerable delays due to this requirement alone leading to cash flow problems.
But, it gives no foolproof guarantee against pilferage as the fundamental cause remains un-addressed. When, subsidized urea is available from the retailer at a price which is ½ to ¼ of the cost [or the price at which it would sell without subsidy], there will always be incentive to divert. The surveillance under m-FMS and Aadhaar verified sale may prevent but can’t eliminate.
For instance, a small farmer can be enticed to buy more than his requirement [the regulations don’t impose any cap on the quantity he can buy] and he can transfer the excess to a chemical factory. The neem coating of urea [mandatory since 2015-16] which makes it unsuitable for use in chemical factories can be helpful only if the government has the machinery to track and check a mammoth 600 million bags. That is a herculean task. Apart from requiring deployment of manpower leading to extra burden on the state finances, this can also breed in corruption.
Furthermore, even if urea can be checked for neem coating, the incentive for smuggling the subsidized material to the neighboring countries [for use by farmers therein] would still remain.
As regards, the problem of delayed payments to fertilizer companies, this won’t go away despite the promise of the government to release 100% amount after sale by the retailer. This is because year-after-year, the provision for fertilizer subsidy in the budget has been consistently lower than the requirement. For instance, during 2017-18, the shortfall was Rs 30,000 crore.
In this backdrop, the assertion of DoF that under DBT, payments to the manufacturers are being made within a week of the generation and submission of the bill [online] does not carry conviction. It may well be that during the first half dues are cleared promptly but when available funds dry up towards the latter half, payments will get delayed.
Finally, the new scheme does little to force manufacturers improve efficiency and reduce cost as the extant system of giving them subsidy on unit-specific basis under NPS continues. In this scenario wherein there is no incentive to invest in new fertilizer capacity, high dependence on import is unavoidable.
What then is the way forward? The government should stop routing subsidy through manufacturers; instead, this should be credited to the account of farmers. The manufacturers would be free to sell fertilizers at market based price and won’t have to go through the stress of delayed subsidy payments. This scenario will also be completely free from the menace of diversion. Moreover, the subsidy can be better targeted resulting in savings.
A market driven regime [with subsidy going directly to farmers] will unleash competition among manufacturers, incentivize them to reduce cost and innovate to bring customized solutions in sync with farmers’ needs. It will enable farmers put subsidy to best use and enhance fertilizer use efficiency.
In short, Team Modi should go for big bang policy reforms to complement the current approach which is focused only on effective implementation of the subsidy scheme.
Kudos! Uttam Gupta Ji… Nice Blog…. I agree with you on the final few suggestions of DBT in fertilizer to be credited to farmers accounts. I have a plan how that can be done.
Firstly government should make a rule that any aadhaar holder above 18 years should mandatorily link his aadhaar number with any one of his bank accounts.[ this solves the problem of routing benefits ]
Since any adult can purchase fertilizer we can ensure that he/she pays market rates and subsidy reaches his/her account. This also makes it easy for government to keep track of who got how much benefit in an entire year.
Agreed