Addressing an election rally in Tamil Nadu, prime minister listed the major achievements of his government which, he exhorted, is exclusively for the poor and the oppressed and is sorting out issues faced by them one by one. One of these achievements is “helping the poor farmers surmount the urea shortage which has been haunting them for years”.
Modi said immediately after swearing in as PM, he received letters from Chief Ministers of States and farmers about the severe shortage of urea.
“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”
Urea is the most commonly used fertilizers and predominant source of nitrogen or ‘N’ supply. Recognizing its critical role in increasing crop yield and ensuring food security, all along the government has kept its import, production, movement, distribution and pricing under control and paid mammoth subsidy to make it affordable to farmers.
In the 70s and 80s, a conducive pricing and subsidy policy framework was put in place to increase domestic production on one hand and increase in consumption on the other. These efforts yielded good results during those two decades [more so in 80s] and things continued to look up during 90s though the earlier pace was not sustained.
However, since 2000, the situation has deteriorated with near stagnation in domestic production [not even one new urea project or brown-field/expansion unit was set up] leading to increase in imports. This was primarily due to an adverse policy re-orientation triggered by mounting pressure to reduce subsidy without analysing its real causes.
Currently, India faces shortfall in domestic production vis-a-vis consumption of about 8 million tons. Since, urea imports are canalized [only agencies authorized by government can import] and their quantity and timing are decided by fertilizer and agriculture ministries, mis-match between arrivals and when farmers need is inevitable.
An added factor exacerbating the shortage – as pointed out by Modi time and again – is diversion of substantial quantities [around 30%] to industrial uses besides smuggling to neighbouring countries. If, 9 million tons [out of total annual consumption 30 million tons] is not available for agriculture, this unavoidably leads to severe shortages.
To tackle this, last year, the government directed all manufacturers/importers to mandatorily coat all of urea produced/imported with neem which – Modi exudes confidence – will eliminate this problem. His argument is that neem coating renders urea unusable for industrial purpose; hence traders can sell only to farmers.
But, this is a simplistic administrative solution to a complex problem. Even this has practical limitations. 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 entire chain of supply and distribution. Imagine the huge contingent of inspectors who would be needed to do this job throughout the length and breadth of the country. And, don’t forget the corruption and bribery that it will give rise to as these officials get sweeping powers.
The main trigger behind shortage and black marketing is the maximum retail price [MRP] of urea. During the last one-and-a-half decade or so, this was not increased at all except once [viz., 2010 when it was hiked by a meagre 10%]. The current MRP is ridiculously low at Rs 5360 per ton or US$ 81 per ton (at current exchange rate US$ 1=Rs 66).
The production cost from even most efficient gas based plant is more than double at Rs 11,000 per ton and cost of import is 4 times higher at around Rs 20,000 per ton. The price in neighboring countries such as Nepal, Bangladesh, Pakistan, Burma etc is 3-4 times or US$ 250-300 per ton. This scenario is very tempting for industrial users in India and even for farmers in our neighborhood. 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?
When, supplies are diverted, there is no way farmers can escape shortages. Adding salt to the injury is heavy dependence on import which gives politicians and bureaucrats lot of room to manoeuvre with ample scope for corruption. This is all the more when they have unfettered powers to take decisions [courtesy, policy of allowing it only through designated state agencies].
Low indigenous supply in turn, is the result of flawed policies. Here, control on MRP at a low level is part of the problem. The other is a flawed pricing regime for manufacturers [so called new pricing scheme or NPS] under which each unit gets compensated for its unit-specific production cost. That leaves no room for efficient ones to produce more and for inefficient ones to exit.
The fiscal pressure too aggravates supply constraint. When, MRP is kept low despite all round inflation, fertilizer subsidy is bound to increase. Since, this has to be reined in [courtesy, fiscal consolidation road-map], the government axes manufacturers by disallowing various costs. This squeezes margins and even loss. They have no incentive to expand and investors hate to come in.
If, Modiji is really serious about curbing shortage and black marketing of urea, he needs to correct present flawed policies as neem coating alone won’t do [though it is desirable as it helps in increasing use efficiency]. The following steps merit urgent consideration:-
(i) de-regulate urea price and remove movement and distribution controls;
(ii) credit subsidy to bank account of farmers seeded with Aadhaar;
(iii) de-canalize urea import
Time is to act within the current year; if he misses the bus now, it won’t be possible till his term ends i.e. 2019.
age old topic and fully agree that deregularisation is need of the hour.