HIGH COST OF POPULIST UREA POLICY

The Union Government’s decision to freeze the maximum retail price of urea for four years is bewildering. The decision was taken on May 13 at a Union Cabinet meeting chaired by Prime Minister Narendra Modi. During the past one-and-a-half decade or so, the MRP of urea, which has been under statutory control for close to six decades now, was not touched at all — except once in 2010, when it was increased by a meagre 10 per cent. This was despite the fact that inflationary forces had gripped all other sectors and the minimum support prices of paddy, wheat and other cereals were increasing manifold.

At Rs5,360 per tonne (or $85 per tonne), the current MRP of urea in India is ridiculously low compared to the prices in neighbouring countries. And let’s not forget the reports of rampant smuggling here. Out of the total consumption of urea that amounts to about 31 million tonne (2014-15), a substantial portion (30 per cent as per estimates) is diverted for industrial use. All thanks to the artificially low price that generates huge arbitrage opportunities.

The current selling price of non-urea fertilisers, not subject to price control, are substantially higher. The price of diammonium phosphate/nitrogen, phosphorous, and potash (potassium) fertilisers is between Rs24,000 and Rs22,000 per tonne, which is four to 4.5 times higher than urea. The price of muriate of potash is Rs17,000 per tonne. This high prices of non-urea fertilisers has led to excessive and indiscriminate use of urea (main source of nitrogen) and has substantially reduced the consumption of DAP, NPK and MOP, importance sources of potassium and phosphorus. As a result, the current NPK use is heavily titled at 8.3:2.4:1 as against the ideal ratio of 4:2:1.

This imbalance in the use of fertiliser is not only reported from high-consuming States like Punjab, Haryana, western Uttar Pradesh and Andhra Pradesh, but also from other States where the irrigation network is not so strong. This continued imbalance — in vogue since 1992, when the Government suddenly de-controlled non-urea fertilisers while keeping urea under control — has led to the degradation of soil, groundwater pollution and air pollution. This can have a serious impact on the overall production of crops and also on human health.

While on one hand, there has been a continued control on the MRP of urea, there has also been a steep increase in the price of feedstock and other inputs, apart from the increase in the cost of imported urea. The result is that fertiliser subsidy has grown by leaps and bounds. Subsidy on urea has increased from Rs5,800 crore in 1992-1993 to Rs 43,000 crore in 2014-2015. Successive Governments’ efforts at fiscal consolidation have been hampered due to this.

For about 90 per cent of domestic urea production, gas remains the dominate feedstock. Due to a shortfall in the production — around 100 million standard cubic meter per day— domestic availability of gas for fertiliser is only about 26 mmscmd as against the required 47 mmscmd. This has lead to the import of liquefied natural gas which is available at a much higher price than domestic gas. Yet, much urea is wasted due to excessive and inefficient use. Successive Governments have recognised these problems but nothing has been done.

In the Economic Survey presented to Parliament before the Union Budget, one invariably finds a reference to the persisting imbalance in the use of fertiliser and the Government stresses on the need for corrective action. Yet, the Government continues with the old flawed and disjointed policies — control and keeping the MRP of urea at low levels, occupying a pivotal position in these policies.

Mr Modi is known for his tough and uncompromising stance on reforms and he has walked the talk in a number of areas. The Economic Survey, presented before this year’s Budget, also recognised the severe imbalance in the use of fertiliser and the rising subsidy. The Government also had a report from the expenditure management commission which suggested steps to rationalise subsidies. Why is it then that the Modi Government is unable to walk the talk in this area?

To reduce this imbalance, the Government should increase the subsidy on non-urea fertilisers so that the selling prices of the latter can be brought down. Subsidy rates on DAP, NPK, MOP and SSP for 2015-2016 have been kept at the same level as in 2014-2015. This, alongside the decision to freeze the price of urea for the next four years (starting 2015-2016) and a commitment to fiscal consolidation, which will not allow increase in subsidy on non-urea fertilisers, means that the imbalance in fertiliser use is here to stay.

Mr Modi should have dismantled the extant unit-wise new pricing scheme for urea and replaced it with a uniform nutrient-based scheme to bring the policy dispensation in line with non-urea fertilisers. This recommendation was made by a Group of Ministers in 2012. Yet, Mr Modi has persisted with the NPS with some tweaking which will neither give more production nor save subsidy. It will not even improve efficiency of fertiliser use.

The Government says, “Neem coating of urea (mandatory for 75 per cent of production and can go up to 100 per cent) will ensure that it is not diverted for industrial use.” But, who will do the policing? Who will check each and every bag (we are talking of a colossal 600 million bags of 50kg each)? That apart, unless the main cause — artificially low urea prices — is addressed, it will be impossible to rein in diversion and indiscriminate use.

The share of fertilisers in the total cost of agricultural inputs is less than 10 per cent. Therefore, even if the price of urea is increased by 50 per cent, a farmer’s expenses on inputs will go up by five per cent only. This too can be offset — in fact, more than offset — by improving the efficiency in the use of fertilisers and adopting scientific agronomic practices. If properly explained to the farming community, the decision to increase urea prices won’t invite any adverse reactions.

Still if Mr Modi is unable to break-away from the Congress DNA, an overriding reason can only be political. Politics prior to State elections, especially in rural areas, have been impregnated with the debate on the price of urea, which is by far the most popular nitrogenous fertiliser and considered the king among all fertilisers. Any Government even whispering about an increase in, forget actually increasing, urea prices, will be viewed as anti-farmer.

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