This is the only way to eliminate diversion, prevent excess use, promote competition, and lower cost
The Centre is planning to conduct pilots in a few districts of the country on a modified version of direct benefit transfer (DBT) in fertilisers that would establish some connection between land holding and the nutrient’s consumption. The intent is to monitor consumption, prevent excess usage and chances of misuse.
DBT, as the wording implies, has to do with transfer of fertiliser subsidy. Fertiliser subsidy arises because the Centre directs manufacturers/importers to sell fertilisers to farmers at a low maximum retail price (MRP), unrelated to the cost of supply, which is much higher. In the case of urea, the difference is reimbursed to the manufacturers as a subsidy on a ‘unit-specific’ basis.
In the case of phosphate and potash (P&K) fertilisers (call them non-urea fertilisers), it fixes ‘uniform’ subsidies on a per-nutrient basis for all manufacturers and importers who are expected to deduct this from the cost to arrive at MRP.
The fundamental point to note here is that unlike other sectors where the manufacturers/importers charge consumers a price that fully covers the cost of supply (or market determined price), fertiliser producers—under directions from the Central government—charge less. For instance, against Rs 3,000 being the cost of a 45 kg bag of imported urea, they charge only Rs 242 from the farmers and get reimbursement of the shortfall of Rs 2,758 as subsidy from the Centre.
The benefit of subsidy accrues to farmers (it is embedded in the price) as but for financial support of Rs 2,758, they would not have got access to urea at Rs 242.
This system is highly susceptible to misuse and excessive use. First, the existing scenario, namely selling price being a small fraction of the cost of supply (1/12 of imported urea and 1/10 of domestic urea) is very tempting for industrial users in India and even to our neighboring countries such as Nepal, Bangladesh, etc. Dubious traders deploy all tactics to divert this material—available at a throwaway price—to them (industries and neighbors) and make a killing.
Second, the system of calculating the cost of making urea for the arriving at subsidy on unit-specific basis protects high cost and inefficient units, even as it doesn’t incentivize low cost, efficient units. Moreover, it scuttles innovation by the industry to make better and customized solutions to meet farmers’ diverse needs. Above all, this is far from being conducive to attract investment for growth.
Third, keeping the MRP at a ridiculously low level leads to excessive use of urea, which in turn leads to imbalance in fertilizer use (the present NPK use ratio is 6.7:2.4:1 against the desired 4:2:1) and resultant decline in crop yield, deterioration in soil health and adverse impact on the environment.
Fourth, giving subsidies by ordering sale at a uniform MRP creates an anomalous situation whereby even the better off/rich farmers get its benefit (albeit by default). In fact, the quantum of subsidy availed increases in proportion to the quantity of fertiliser purchase— as the scheme doesn’t provide for any cap.
The misuse is happening on a large scale, which is evident from an analysis by the chief economic advisor (CEA) in the Economic Survey for the FY 2015-16. As much as 24 per cent of the subsidy is spent on inefficient producers, 41 per cent is diverted to non-agricultural uses, including smuggling to neighboring countries, and 24 per cent is consumed by larger, presumably richer farmers.
Prior to March 2018, manufacturers were getting 95 per cent of the subsidy on urea (85 per cent in case of non-urea fertilisers) ‘on receipt of material at a district’s railhead point or approved go-down’ and balance 5/15 per cent on confirmation of sales to farmers by states. That arrangement was prone to “wholesale diversion” of fertilizers straight from the railhead or go-down.
From March 2018, the government has made disbursal of subsidy to manufacturers conditional upon actual sales to farmers and these getting registered on point-of-sale (PoS) machines after undergoing Aadhaar authentication.
However, there is no restriction on the number of bags a farmer can purchase. This new regime together with tracking of physical movement under a mobile Fertiliser Monitoring System (m-FMS) (launched in 2013-14, m-FMS provides information on stock position, sale and receipt of fertilizers till the last retail point), ensures a much higher level of accountability on all stakeholders in the supply chain, namely, manufacturers, wholesalers and retailers.
In August 2020, the Centre had taken a number of administrative measures viz. restricting purchase of urea to 100 bags (down from 999) per transaction by one purchaser, capping the number of such transactions per month and keeping a tab on top 20 urea purchasers in each of their districts in 22 major fertilizer-consuming states. This shows that even under the new dispensation, diversion was happening at wholesale level prior to material reaching the retail point.
Even after sale at the retail level, diversion is not ruled out as the buyer need not be a farmer and can buy any quantity of fertilizers as all that she has to do is to furnish her identity/Aadhaar number.
To prevent it, the government had also mooted barring non-farmers from purchasing subsidised fertilisers and putting a cap on the number of bags a farmer can buy at the subsidized price for the whole season. If the farmer still wants to buy extra, those bags would be available only at the non-subsidized price. For over two years, this idea was under wraps; it has been resurrected now.
Under the proposed system, farmers’ details will be fed on the PoS machines, including the land she holds, crop grown, area under cultivation, etc., and requirement of the number of bags of fertilizers such as urea, DAP, etc. All this will show up the moment a farmer enters the Aadhaar details and sale of subsidized material will be restricted to the quantity shown on the machine.
Given the allurement of low-priced fertilisers, diversion can happen at any level in the supply chain; authorities however alert can’t prevent it. In 2015-16, the government made neem coating of urea mandatory (it makes urea unsuitable for use in chemical factories). But this has failed to make a dent.
The modification does nothing to change the extant system of reimbursing subsidy on unit-specific basis. So, a portion of the subsidy will continue to be cornered by inefficient producers. Moreover, continued availability of low priced urea will ensure that its excessive use continues.
Finally, there is nothing in the proposal to suggest that rich farmers will be denied access to subsidised fertilisers. The solution to the problems can’t be divorced from the root cause. This has to do with routing subsidies through the suppliers. The government should stop it, end control on MRP and allow manufacturers/importers the freedom to fix retail prices based on the market forces. The subsidy should be directly given to farmers. This is the only way to eliminate diversion, prevent excess use, promote competition, lower cost, enhance efficiency and restrict subsidies only to poor farmers.
(The author is a policy analyst)
https://www.dailypioneer.com/2022/columnists/fertiliser-subsidy-must-go-to-farmers-directly.html
https://www.dailypioneer.com/uploads/2022/epaper/december/delhi-english-edition-2022-12-12.pdf