In a bid to tackle diversion, hoarding and black marketing of urea (a widely used fertilizer that constitutes nearly half of India’s total fertilizer consumption), the Union government has decided to restrict its purchase to 100 bags from 999 bags per transaction by one purchaser.
In a letter dated August 27, 2020, addressed to state chief secretaries, the ministry of chemicals and fertilizers, Chhabilendra Roul has sought their opinions on ‘how many such transactions should be allowed per month to each purchaser’. He has also asked states ‘to identify top 20 urea purchasers in each of their respective districts’.
States have also been asked to collect details from buyers which include quantity of urea purchased, dates of purchase, point of sale such as retailers, agricultural land owned by buyer, land under cultivation, among others.
At the outset, one gets flummoxed at the very mention of diversion, hoarding and black marketing of urea when viewed in the backdrop of a statement by none other than the Prime Minister, Narendra Modi in early 2016. Addressing a rally in Tamil Nadu, he said “Urea was being sold in the black market and farmers had to bribe officials to get their quota of urea. My government put an end to the practice of corruption in the sale of urea. We have started distributing neem–coated urea which helped farmers bring down their cost of production as well as quantity of chemicals used in farm operations”
If, the menace had been eliminated then, how come it is persisting even now. To unravel the mystery, at the outset, it is important to understand system of urea supply, distribution and pricing.
To make urea affordable to farmers, the Centre controls its Maximum Retail Price (MRP) at a low level, unrelated to the cost of production and distribution, which is higher. The excess of cost over MRP is reimbursed to the manufacturer as subsidy which varies from unit to unit depending on its cost of production. The cost of transportation (it includes primary movement by rails from the plant and secondary movement from the unloading rake point by road to the retailer) is reimbursed under a uniform freight policy. The system was launched way back in 1977 as Retention Price Scheme (RPS). In 2003, it was rechristened as New Pricing Scheme (NPS).
Since 1973, movement and distribution of urea is controlled under the Essential Commodities Act (ECA). The Ministry of Agriculture (MOA) at Centre formulates a ‘Supply Plan’ in consultation with the states/UTs and manufacturers before the commencement of each season viz. Kharif (April – September) and Rabi (October – March). The ‘Supply Plan’ is a blueprint of how much quantity each manufacturer will supply to each state. From 2003, up to 50% of urea production is subject to movement and distribution control. The states allocate entire quantity of urea arrivals and track up to district level.
Even as production cost has increased leaps and bounds, the government has literally kept the MRP frozen. During the last two decades or so, this was not increased at all except once (viz., 2010 when it was hiked by a meager 10%). The current MRP is ridiculously low at Rs 5360 per ton or US$ 71 per ton (at current exchange rate US$ 1=Rs 75). The average production cost from gas based plants is more than four times at about US$ 320 per ton and cost of import is about US$ 300 per ton. The price in neighboring countries such as Nepal, Bangladesh, Pakistan, Burma etc is also high in the US$ 250-300 per ton range. This scenario is very tempting for industrial users in India and even for farmers in our neighboring countries.
When, our industries can access ‘subsidized’ urea available at 1/4th the price they will have to import, why would they not grab it? Why would dubious traders not divert to them supplies meant for farmers? And, why would they not smuggle it out of India?
It is this flawed system of administering subsidy i.e. routing it through the manufacturers and keeping a huge gap between the MRP and the cost by keeping the former at artificially low level that lies at the root of diversion and black marketing of urea. This offers a huge arbitrage opportunity to those who are hell bent on making quick buck and will remain as long as the system remains in place.
However, the government is only looking purely at administrative measures to deal with the problem. In 2015, it issued an order requiring all manufacturers/importers to mandatorily coat all of urea supplies – both domestic production and import – with neem. Modi believed that this would help by rendering neem-coated urea unusable for industrial purpose. Hence, traders will have no incentive to divert and be forced to make the entire quantity available for use by the farmers. Shortages and black marketing will be a thing of the past.
But, nothing of that sort seems to have happened or else why would the government still be working on measures to curb it (ref: August 27, 2020 letter from the fertilizer secretary). Why did it not work?
Though, ton is a unit of measurement used for statistical purpose (besides production), actual supply, movement and distribution is done in bags of 50 kg each. So, 30 million tons will translate to 600 million bags (20 bags for a ton). It is impossible to do policing of such humongous number in the supply and distribution chain (imagine the huge contingent of inspectors needed to do this job throughout the country). Also, don’t forget the corruption and bribery that it will give rise to as officials get sweeping powers.
Urea would be rendered unusable for industrial purpose and hence supplied only for use for farmers – as contemplated by Modi – provided it is actually coated with neem. What if it is not, a real possibility when there is nobody to check? In that scenario, it will be business as usual. This is precisely what is happening.
Now, the government has come up with another idea which is no less clinical. Put simply, the objective of this exercise is to assess the fertilizer requirement in a district during a month or season (that depends on factors such as agricultural land owned by buyer/farmer, land under cultivation, crops grown, nutrient status of the soil etc) and juxtapose this with the quantity of purchase by major distributors. This is to determine whether or not they are cornering/buying more material than what is actually required.
There are 718 districts in the country. Even if we focus on top 20 distributors in each district (as mentioned in the order), the government will have to collect data on 14,360 entities. The ball does not stop here. It will also need to know how much material is dispatched by each one of them and received at retail points (their total number is a whopping 264,000). While, this captures the supply, on the demand side, the agencies should have district-wise information which in turn, will require data on farm holdings viz. cultivated area, crops etc; their number is a mammoth 146 million.
This is a marathon exercise which will require deployment of huge resources and take years to complete. Is it really worth going ahead with it? Is it merely to prove that certain distributors have cornered most of the material and indulging in diversion and black marketing? After this, what does the government propose to do next? How will a cap on the quantum of purchase by a distributor help? Even assuming for a moment, this would help, how will it be enforced? Who will do the policing? Do the states have the machinery?
The course of action mooted in the letter addressed by secretary, fertilizer ministry will meet the same fate as neem coating of urea mandated 5 years back. It seems our policy makers are going into wilderness. They have either no clue about the real causes behind the problem or they know but consciously gloss over it. They fear that dealing with these upfront will require some tough measures which could be embarrassing for the political class. But, this can’t be indefinitely deferred.
There is an urgent need to correct present flawed policies. The government should put an end to control on the MRP of urea, allow manufacturers freedom to fix it based on market forces and remove movement and distribution control. As for helping farmers, the subsidy should be directly credited to their bank account. When, urea at throwaway price is not available, this will automatically nail any scope for diversion and black marketing.
Will Modi bite the bullet?