On July 4, 2016, the minister for chemicals and fertilizers, Ananth Kumar announced government’s decision to reduce maximum retail price [MRP] of non-urea fertilizers viz., DAP [di-ammonium phosphate: 18% nitrogen [N] & 46% phosphate [P]]; MOP [muriate of potash] [60% potash [K]] and complex fertilizers [contain N, P and K in different proportions] with immediate effect.
The retail price of DAP has been reduced by Rs 2,500 per ton to Rs 22,000/tonne, MOP by Rs 5,000 per ton to Rs 11,000/tonne and those of complex fertilizers by Rs 1,000/tonne on an average. The minister went on to say that the rate cut would entail a benefit of Rs 4,500 crore to farmers and help promote balanced use of fertilizers.
On the face of it, this gives an impression that farmers [reeling under the debilitating effect of 2 drought years viz., 2014-15 & 2015-16] will get a big bonanza during the current year in terms of saving in fertilizer cost on top of crop prospects bolstered by good rains. But, the facts on ground zero are completely out of sync.
At the outset, a few words on how the system of pricing and subsidy works for non-urea fertilizers. Under nutrient based scheme [NBS] in vogue since April, 2010, the government gives fixed subsidy on per unit nutrient basis ‘uniformly’ to all suppliers [domestic manufacturers and importers] even as the latter have flexibility to fix MRP.
The freedom given to the supplier/manufacturer in fixing MRP helps him in making necessary adjustment in a manner so that this plus the subsidy rate [albeit ‘fixed’] enables him to fully cover the cost of making the product available to the farmer. The precise level of retail price will depend on movement in its international price. If, latter moves up, former will increase and vice versa.
For the scheme to work smoothly, subsidy rate needs to be calibrated in a manner such that the interests of farmers and exchequer are balanced. At the same, viability of manufacturers [through whom subsidy is routed] should be ensured. Unfortunately, in the past, the government did not perform this balancing role even as all its actions were guided by an obsession to save on subsidy.
When, international price of raw materials [phosphoric acid and ammonia] increased, it kept the subsidy rate unchanged. This led to increase in MRP and resultant burden on farmers. When, raw material prices declined, the government mopped up the benefit [by reducing subsidy] thereby denying relief to farmers. Overall, there was steep increase in prices of all non-urea fertilizers.
Last year, MRP of DAP was around Rs 24,500 per ton and MOP Rs 16,000 per ton. Juxtapose this with ridiculously low price of urea at Rs 5360 per ton [due to control and a mere 10% increase during last 15 years]. And, we have excessive use of urea resulting in imbalance in fertilizer use. Currently, NPK use ratio is 8:3:1 [against an ideal 4:2:1], in turn affecting crop yield, soil health and the environment.
Have things changed now? Not quite so. During the current year too, the government reduced the subsidy rates for ‘N’ and ‘P’ by 24% and 29% respectively to mop up a good portion of decline in international prices, though the subsidy for ‘K’ has remained un-changed [implying no mop-up]. After making adjustment for cut in subsidy rate, the manufacturers/suppliers had reduced prices of complex fertilizers by Rs 1000 per ton and MOP by Rs 4,000 per ton.
Fertilizer Association of India [FAI] informed the government about these cuts in a meeting taken by prime minister in June, 2016. Yet, for the minister to now announce reduction in price viz., DAP Rs 2500 per ton and MOP Rs 5000 per ton smells of dubious intentions. There are several anomalies in his statement.
First, for the government to notify prices when these fertilizers are already decontrolled is anomalous. Second, these cuts are by Rashtriya Chemicals and Fertilizers Limited [RCFL] and National Fertilizers Limited [NFL], both PSUs. They do not account for more than 5% of total sales. If, only RCFL/NFL were to reduce the price then, promised relief to farmers would be peanuts. Then, why would minister talk of a big relief of Rs 4500 crores?
Clearly, Ananth Kumar was talking of price cut on total sales. This smacked of government’s intent to control retail price of non-urea fertilizers sold by all manufacturers. This not only violates the fundamental tenet of decontrol and NBS but also is an indirect [subtle] manner of coercing them to give more than what they can afford [based on cost and subsidy rate] even disregarding their inherent disadvantage vis-à-vis imported DAP.
The global suppliers of DAP operate as a cartel. They also happen to be suppliers of phosphoric acid and fix its price in a manner that the cost of manufacturing DAP in India is higher than imported DAP. Thus, even during the current deflationary phase, drop in price of imported phosphoric acid is much less than DAP import. So, the industry suffers from a handicap of US$ 50 per ton [cost of domestic DAP US$ 400 per ton vs imported DAP US$ 350 per ton].
The government has done nothing to address this handicap as apart from ‘uniform’ subsidy, even customs duty [CD] on phosphoric acid, rock phosphate and sulphur [raw material in DAP manufacture] @ 5% is the same as on imported DAP [industry’s request for removing CD on former has been pending for long]. Yet, it expects domestic manufacturers to reduce MRP in sync with decline in cost of imported DAP.
Inordinate delays in payment of subsidy have further compounded their woes. As of now, thousands of crores are held up in arrears [courtesy, grossly inadequate budget allocation year-after-year]. According to FAI, the interest cost of financing subsidy receivables is Rs 1500 per ton. In this backdrop, to expect manufacturers to pass on disproportionate cuts in price to farmers will push them to the brink.
Any relief to farmers cannot be seen in isolation from the industry. The government should take all requisite steps to protect its viability and ensure its health and growth [at present, it barely meets 40% of DAP requirements]. Having fixed subsidy rate under NBS, it must not interfere – direct or indirect – in fixing retail price and should refrain from any arm twisting, delaying subsidy payment or not paying at all.
To give some protection for now, it should remove CD on all raw materials [phosphoric acid, ammonia, rock phosphate and sulphur] imports even while retaining on CD on DAP @ 5%. At present, under WTO, India is committed to a bound rate of 5% on DAP implying that the applied rate cannot exceed this level. Therefore, in the medium-term, it should aim at getting the bound rate hiked to 25-30% to ensure adequate protection in future.
For the long-term, the government should encourage acquisition of stakes in rock phosphate and sulphur mines in countries richly endowed with these materials. This will help in ensuring supply of these raw materials at competitive prices in turn, enabling domestic manufacture of DAP at lower cost.
As regards, imbalance in fertilizer use, a meaningful dent on this endemic problem can be made only by bringing urea under NBS [a long pending reform] with a substantial cut in subsidy rate. The aim should be to bring up urea MRP to at least Rs 10,000 per ton so that DAP price is no more than 2 times urea price [minister’s prescription working on DAP price alone will still leave the ratio at more than 4:1].
The fertilizer industry is in dire need of ‘holistic’ solutions and quick fix will simply not work. The prime minister should goad fertilizer ministry in that direction.