The direct benefit transfer [DBT] scheme for fertilizer subsidy was launched at the beginning of Rabi 2017-18 crop season [October 2017 – March 2018] in certain parts of India and progressively extended to cover all the 31 states and union territories [UTs] – starting from April 1, 2018.
Its stated objectives were: (i) ensure timely subsidy payments to the manufacturers; (ii) clearing the backlog and (iii) plugging pilferage and leakages in the system. Have these been achieved? To seek an answer to these questions, let us capture a few basics about fertilizer pricing and subsidy.
To make fertilizers affordable to farmers, the union government follows a policy of controlling their maximum retail price [MRP] at a low level unrelated to the cost of production and distribution which is higher. To ensure that production is viable at this price, it promises to reimburse the difference between the cost and MRP to the manufacturer. The reimbursement amount is subsidy.
In case of urea, the subsidy is administered under the New Pricing Scheme [NPS] and varies from unit to unit. Under NPS, the Fertilizer Industry Coordination Committee [FICC] – under the department of fertilizers – fixes the retention price [RP] [admissible production cost] for each unit and determines the subsidy per ton as RP minus MRP. For decontrolled complex fertilizers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme [NBS].
As regards subsidy payments, prior to Rabi 2017-18, the companies generated subsidy bills as soon as the stocks moved to the district retailers as per the ECA [Essential Commodities Act] supply plan finalized before the start of every season based on tripartite consultation between the center, states and manufacturers. The initial payment of 95% of the subsidy to urea manufacturers and 80% – 85% to complex manufacturers was released as “on account payment” on receipt of fertilizers in the district.
The balance 5%/15% – 20% for urea/complexes was paid on confirmation of sales to farmers by state government.
As per rules, the FICC/DoF is supposed to release the “on account payment” within 45 days from the date of submission of the bill. For example, in respect of material received in the district during the month of April and bill submitted in May [first week], the payment should normally be middle of June. But, this rarely happens. The payments are delayed by several months. The release of balance amount takes even longer as authentication of sale to the farmers by the states gets mired in bureaucratic red tape.
An overarching reason for this is inadequate allocation in the budget. For instance, the allocation for the current year is Rs 70,000 crore. After paying the arrears from the previous year about Rs 30,000 crore, the net amount available is Rs 40,000 crore. Against this, the requirement is about Rs 84,000 crore [including Rs 14,000 crore due to 34% increase in gas price during the year]. So, the available funds barely suffice to meet the requirement for 6 months.
As per rules, the government is under no obligation whatsoever to pay interest on delayed payments [even as it charges interest on recovery to be made from a manufacturer]. This together with the extant methodology of accounting on ‘cash basis’ viz. recording expenses when payment is made – only reinforces its persistence with inadequate provision in the budget year-after-year.
Under the DBT scheme, the subsidy for each bag of fertilizer sold through a retailer has to be credited to the bank account of the concerned manufacturer within a week of the transaction being captured in a point-of-sale [PoS] device through bio-metric authentication.
Such a system is free from cumbersome procedures, avoids human interface, promotes transparency and cuts bureaucratic red tape. No wonder, under DBT, the government has promised almost instantaneous [within a week] transfer of subsidy. But, this would happen only if sufficient funds available. If, the allocation leaves the kitty empty for over six months in a year, even a technology based system will be of little use.
For the same reason, there is little chance of the backlog of subsidy dues getting cleared. In case, FICC/DoF decide to clear the backlog first then, manufacturers won’t get current year’s dues.
As regards plugging pilferage, so long as subsidized urea is available 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 for use in chemical factories at a higher price. The Aadhaar verified sale may prevent but can’t eliminate.
The neem coating of urea which makes it unsuitable for use in chemical factories could be helpful only if the government has the machinery to track and check a mammoth 600 million bags [total consumption of urea]. 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.
For the scheme to help in making timely/prompt payments, there is absolutely no escape from making adequate provision in the budget. For plugging leakages however, the government should strike at the root cause by disbanding the present system of routing subsidy through fertilizer manufacturers. The subsidy should be credited to the account of the farmer.
Under this system, the manufacturer will sell at cost/market based price. However, with subsidy coming directly to the farmer, he won’t have to pay extra. This will eliminate diversion even as all purchase from the dealers will be genuine meant for use in farming. Other gains will accrue by way of producers being forced to reduce cost and bring customized solutions in sync with farmers’ needs. The latter will put subsidy to best use and enhance use efficiency.
Above all, this will help in better targeting of subsidy and thereby bring about significant savings. In turn, it will facilitate better balance between the requirements and available funds.
However, in a populism gripped eco-system with even the public glued to getting almost everything [fertilizers included] free or throwaway price, such a move looks like day-dreaming.