The Government’s failure to bring a comprehensive set of reforms for the fertiliser sector is a missed opportunity. Glaring anomalies need to be fixed to harness long-term potential
Having returned to power for a second term with a thumping majority, it was expected of the Modi Government to kick off immediate reforms for the fertiliser sector. Being just the beginning of the five-year term, now is the golden opportunity for it to opt for big bang reforms as any adverse fall-out in the short-run (inevitable when harsh measures are implemented) won’t pose any threat to the Government. Alas, it missed the opportunity.
Finance Minister Nirmala Sitharaman’s Budget, too, had no mention whatsoever of substantive issues pertaining to the fertiliser policy even as allocation for fertiliser subsidy at about Rs 80,000 crore during 2019-20 (this does not provide for the roll-over of Rs 32,000 crore from the previous year, including this, total payment would be Rs 112,000 crore) says it all.
The fertiliser subsidy has remained high and on a rising trajectory (only two years back, it was Rs 66,000 crore in 2017-18) despite steps taken by the present dispensation viz, mandatory neem-coating of urea, issue of soil health cards (SHCs), which were intended to curb diversion of urea to chemical factories and improve efficiency of urea use and, thus, bring about reduction in subsidy payments. The anomalous situation arises because successive Governments, including the NDA dispensation under Atal Bihari Vajpayee (1998-2004) and the Modi 1.0 Government (2014-2019), refused to carry out fundamental reforms. At the outset, let us clear some basics regarding this sector.
To make fertilisers affordable to farmers, the Centre controls their 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. In case of urea, the subsidy varies from unit to unit and is administered under the New Pricing Scheme (NPS); whereas for decontrolled complex fertilisers, Muriate of Potash (MoP) and single superphosphate (SSP), a “uniform” subsidy fixed on per nutrient basis, is given to all manufacturers under the Nutrient Based Scheme (NBS).
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 to urea manufacturers under a uniform freight policy. On the other hand, manufacturers of decontrolled complex fertilisers/MoP (excluding SSP) get reimbursement of freight cost only towards primary movement on the basis of actual rail freight, as per the railway receipts.
Thus, the manufacturers/importers of decontrolled complex fertilisers, MoP and SSP receive a step-motherly treatment vis-à-vis manufacturers of “controlled” urea. In case of complexes/MoP/SSP, even as the Government normally keeps the subsidy unchanged, increase in the cost leads to ever increasing MRP. In sharp contrast, it keeps the MRP of urea at a low level (the current price @Rs 5,360 per tonne is more or less the same as it was nearly two decades ago) even as all escalations in cost are absorbed by increasing subsidy.
This results in disproportionately low MRP of urea vis-a-vis the MRP of complex fertilisers, MoP and SSP, prompting the farmers to use more of the former and less of the latter.
Discrimination against complex fertilisers and MoP is also evident in their not getting freight subsidy on secondary movement to retail point (SSP manufacturers don’t even get primary freight for movement from plant to railhead) as also in denial of natural gas — the feedstock used for the making of ammonia — an intermediate used in manufacture of complex fertilisers — to their plants.
These disjointed policies are at the root of increasing imbalance in NPK (nitrogen, phosphorus and potassium) use ratio, declining crop yield, deterioration in soil health and adverse impact on the environment. The issue of SHC can at best guide the farmers on proper fertiliser use but it can do little to stem the opposite impact of the flawed policies.
Low MRP of urea also gives a strong incentive to traders/farmers divert to chemical industries or smuggle to neighboring countries where it fetches a higher price. The neem coating of urea (on which the Modi Government banked heavily to rein in this unhealthy practice) has not helped much or else we would have seen the results in terms of big reduction in subsidy (taking diversion @40 per cent), which is not visible.
The extant unit-wise NPS for urea for subsidy determination does not reward low cost units even while protecting high cost units (thus, we have units producing @Rs 20,000 per tonne plus co-existing with others producing at half this cost). Even in the non-urea segment, where every unit gets the same subsidy, a manufacturer, who manages some savings, is not sure of retaining it as the Government reserves the right to mop it up on examination of high cost data.
It gives no incentive to companies to invest in R&D for delivering more efficient and cost-effective products to the farmers or explore indigenous resources (at present, India depends heavily on import for meeting its fertiliser requirements viz, nearly two-thirds in nitrogen, 90 per cent in phosphate and 100 per cent in potash). As a result, even as the farmers don’t get major break-through in yield, the country remains vulnerable to exploitation by global suppliers.
The system is also highly prone to the misuse of subsidy. According to the Economic Survey (2105-16), 24 per cent of the fertiliser subsidy is appropriated by inefficient manufacturers, 41 per cent gets pilfered on way to the farmers and 24 per cent cornered by large farmers. Only 11 per cent of the benefit actually goes to the poor farmers (those with land holding <2 hectares). These glaring anomalies can be addressed by dismantling controls on MRP and the existing system of routing subsidy through manufacturers. Instead subsidies must be given directly to farmers via Direct Benefit Transfer (DBT) (with this, NPS and NBS will go). A mechanism should be found to exclude better-off/rich farmers for better targetting and lowering subsidy to sustainable level.
Early this year, reportedly, the Finance Ministry and the NITI Aayog was working on a road-map for DBT for fertiliser subsidy and even alluded to club this with the assistance @Rs 6,000 per annum, that is currently being given under PM-KISAN and give the total amount as quasi-universal basic income transfer. But it seems the idea has not caught the attention of the Modi 2.0 Government, else it would have made the announcement to be followed by implementation say from January 1, 2020.
The least the Government could have done was to bring the policy for urea at par with that for non-urea fertilisers by giving uniform subsidy to its manufacturers under NBS (a group of ministers (GoM) under then Agriculture Minister, Sharad Pawar had recommended this way back in 2012). But even this is not done. Alternatively, it could have affected some increase in urea MRP to demonstrate its intent to correct the imbalance in its price vis-à-vis complex fertilisers and MoP. Even this wasn’t done.
Another doable was to be more “transparent” in reporting subsidy figures by switching over from the existing cash-based system to accounting of subsidies on accrual basis (as recommended by the “expenditure management commission” under Dr Bimal Jalan, former Reserve Bank of India Governor in 2015). This, too, was not done. The Modi Government must not allow these things to linger on. It should get cracking on fertiliser reforms not later than February, 2020.
(The writer is a policy analyst)
