A major factor fueling resentment among farmers is the spiraling prices of fertilizers which are critical inputs used in the production of agricultural products.
The maximum retail price (MRP) of urea – the predominant source of nitrogen or ‘N’ nutrient supply – is controlled by the Centre at a low level un-related to the cost of production and distribution which is higher (the excess amount is reimbursed to the manufacturers via the subsidy on a ‘unit-specific’ basis under the new pricing scheme or NPS in short). This price has remained unchanged (today’s price is the same as in 2002) even as all cost escalations are absorbed by increasing the subsidy. However, the worry is with regard to another category of fertilizers which are sources of phosphate or ‘P’ nutrient and potash or ‘K’ nutrient supply.
There are 22 grades of such fertilizers involving use of N, P, K in different proportions – the most widely used being di-ammonium phosphate (DAP) and muriate of potash (MOP). For these fertilizers, the Central Government fixes a ‘uniform’ subsidy on per nutrient basis for all manufacturers under the Nutrient Based Subsidy (NBS) Scheme in vogue since April 2010. The latter are free to fix the MRP but are expected to reflect the subsidy.
Unlike urea where rising costs are absorbed by increase in subsidy thereby keeping MRP immune, in case of P&K fertilizers, generally the Government keeps the subsidy unchanged which leads to ever-increasing MRP. Let us take the case of DAP.
During 2020-21, the cost of production and distribution of a bag (50 kg) of DAP was Rs 1700/-. Then, the subsidy being Rs. 500/-, the manufacturers fixed MRP at Rs 1200/-. In April 2021, due to the increase in international prices of phosphoric acid and ammonia (raw materials used in making of DAP) by 60% to 70%, the cost of supply increased to Rs 2400/-. This led them to increase MRP to Rs 1900/- as the subsidy was kept unchanged at Rs 500/-. This infuriated farmers whom the Government is trying to calm down by announcing on May 19, 2021 hike in subsidy to Rs 1,200/-.
While, this will ensure that the price of DAP is restored to last year’s level of Rs 1200/- (likewise for the other 21 grades), it comes at a huge cost to the exchequer. On sales during Kharif season (April to September) alone, this will increase Centre’s subsidy bill by about Rs 15,000 crore. If, the raw material prices continue to stay at current level compelling the Government to maintain the hiked subsidy even during Rabi (October to March), the additional burden for the whole year will be about Rs 30,000 crore.
Add this to Rs 80,000 crore for fertilizer subsidy provided for in the budget for 2021-22; the total payout will be Rs 110,000 crore. This will be the second consecutive year when subsidy will cross the Rs 100,000 crore mark (during 2020-21, it was Rs 134,000 crore – as per the revised estimate). Given the substantial relaxation in its fiscal deficit (FD) trajectory (revised target 9.5% of GDP for 2020-21 against the budget estimate of 3.5% and 6.8% for 2021-22), provisioning at such high level may not pose a big challenge but this will be a daunting task when it returns to a more disciplined path.
That apart, we need to ask whether the Government is really concerned about making P&K fertilizers affordable to farmers? Is Rs 1200/- per bag a good price that will encourage the use of DAP? The answer is a categorical ‘No’. Even at this level, it is 4.5 times the price of urea currently at Rs 268 per bag (50 kg). This imbalance in price ratio is at the root of excessive use of urea vis-à-vis DAP (in fact, all other P&K fertilizers) resulting imbalance in fertilizer use which affects crop yield and leads to deterioration in soil health.
Spending more and more of taxpayers’ money for such negative outcomes is unconscionable. Blatant misuse of subsidy is manifest in other ways as well. According to the Economic Survey for 2015-16, as much as 24% of it is spent on inefficient producers, 41% is diverted to non-agricultural uses including smuggling to neighboring countries, and 24% goes to larger, presumably richer farmers. This happens because subsidy is routed through producers.
In case of urea, the ‘unit-specific’ system of reimbursing cost to manufacturers accommodates all and sundry including those producing at Rs 1000/- … 1500/- per bag and so on. Moreover, urea being available at Rs 268 per bag – a fraction of the cost of supply is the surest invitation to dubious operators diverting it for making easy money. Given the huge profit (albeit unethical) involved, they have every incentive to even flout Modi’s much-trumpeted mandatory neem-coating that was meant to stop diversion.
Under the existing system, subsidy is built into the price. In view of this and there being no limit on the quantity purchased, a farmer who buys more, corners a higher proportion of the subsidy. A large farmer, having a landholding of 10 hectares, will corner 10-times more subsidy than a marginal farmer having less than one hectare.
By distorting selling prices (courtesy, subsidy), the system fails to generate required incentives or disincentive needed for ensuring optimum fertilizer use. Thus, soil may need more of P&K but, the farmer applies more of N because urea is available cheap. Modi is keen that farmers should bring about 50% reduction in urea use by 2022 but the extant policies are doing just the opposite.
Since, manufacturers see the possibility of higher cost getting reimbursed by way of subsidy, there is no pressure on them to import raw materials at lower cost. India depends on imports for sourcing 90% of its phosphate requirements and 100% of potash needs. There is nothing in the system that will drive them to exploring indigenous sources or ways of increasing efficiency of their use (for instance, if today a manufacturer uses ‘X’ kg of phosphoric acid for producing a ton of DAP, how can it be reduced by say ΔX).
There is dire need for holistic reforms in the fertilizer sector that would reinvigorate all stakeholders do their bit in improving efficiency and reducing cost at all levels viz. supply, distribution and use. Removal of control on all fertilizers and direct transfer of subsidy to farmers should be at the core of these reforms. Sans this, mere adjustment in subsidy amount won’t be of any use in addressing the woes of farmers or putting agriculture on sustainable growth path.