The Govt should remove control on urea and stop giving subsidy through manufacturers; instead, the Government can give it directly to farmers

Inaugurating the revival project —annual production capacity of 1.27-million-ton(MT) neem coated urea — of the Hindustan Urvarakand Rasayan, a public sector joint venture of Coal India Limited, NTPC, Indian Oil Corporation and FCIL — at Gorakhpur on December 7, Prime Minister, Narendra Modi made the following four observations: Despite steep increase in international price of fertilizers during the current year, the Government has ensured that the farmers don’t have to pay more; 100 percent neem coating has helped in reining in diversion of urea to non-agricultural/industrial uses; Gorakhpur a long with four other revival projects currently under implementation will add six million tons to existing annual urea production capacity of 25 MT thereby reducing dependence on its import; and, soil health cards have helped farmers use fertilizers as per soil requirement thereby help reducing imbalance in use.

The above observations may seem to indicate that all is well with the fertilizer sector in India. However, we need a reality check to ascertain where exactly we stand.

The Union Government controls the maximum retail price of urea at a low level, unrelated to the cost of production and distribution, which is much higher. The manufacturers get reimbursement for the shortfall in realization from sale as subsidy on a ‘unit-specific’ basis under the new pricing scheme. Further, they get reimbursement for cost of movement from the factory/port to the retailer under a uniform freight policy. Invariably, the MRP is kept unchanged (today’s price is the same as in 2002) even as all cost escalations are absorbed by increase in subsidy.

In case of phosphatic and potassic (P&K) fertilizers, the government fixes ‘uniform’ subsidy on per nutrient basis for all manufacturers under Nutrient Based Scheme. The manufacturers are free to fix MRP, but are expected to reflect the subsidy in it. They also get reimbursement for the cost of movement (though only up to the railhead). In the past, invariably the government had kept the subsidy unchanged, even as increase in the cost led to an ever-increasing MRP.

The extant systems empower the Centre to set MRP of both urea and complex P&K fertilizers at the intended level. While it exercises direct control on the former as for the latter not under control, it can achieve the same result by adjusting the subsidy rate.

During the current year, from October 1, the price of domestic natural gas (it supplies nearly two-thirds of urea industry requirement) has been increased from $1.79 per million British thermal units (mBtu) to $2.9 per mBtu and is projected to rise to $5.93 per mBtu from April 2022 and $7.65 per mBtu from October 2022. The price of imported LNG (it supplies remaining one third) has gone up from around $5.5 per mBtu in April to US$14 per mBtu and is projected to increase to $20 per mBtu plus from April 2022.

In the non-urea segment, the increase in price is even higher. The current price of imported di-ammonium phosphate (DAP) is $630 per ton, $300 more than last year. The price of phosphoric acid (raw material or RM used in the making of DAP) is around $1000 per ton, up by $375 while that of ammonia (another RM for making DAP) is $670 per ton, higher by $470. The price of muriate of potash at $400 per ton is $170 higher.

Whereas, in case of urea, the increase in production cost due to hike in gas price gets ‘automatically’ absorbed by higher subsidy ensuring that its MRP remains unchanged, for P&K fertilizers also the Modi Government has hiked the subsidy rate substantially (on DAP from Rs 10,000 per ton last year to current Rs 32,760 per ton) to ensure that its MRP remains at last years’ Rs 24,000 per ton.However, this has come at heavy cost to the exchequer.

During 2021-22, the Centre will have to spend around Rs 58,000 crore more (Rs 30,000 crore on P&K fertilizers and Rs 28,000 crore on urea) on top of budget allocation Rs 80,000 crore (Rs 21,000 crore on P&K and Rs 59,000 crore on urea). It is able to absorb such gargantuan subsidy outgo - a total of Rs 138,000 crore - due to a very liberal fiscal deficit target of 6.8 per cent of GDP (Rs 15,00,000 crore in absolute terms). This leeway won’t be available when it returns to fiscal tightening.

A 100 percent neem coating, mandated in 2016, was meant to eliminate diversion of urea which at that point of time was estimated to be around 30 percent.On total urea sale of 30MT during 2015-16, this worked out to 9 MT. This implies that urea used by farmers or actual demand in that year was only 21 MT. The use of neem-coated urea also leads to improvement in its use efficiency. Assuming 20 percent increase in efficiency, farmers could manage with 16.8 MT of urea (21×0.8) to achieve the same level of crop output. In other words, consumption could be even lower at 16.8 or about 17 MT.

Had things worked as promised by Modi, even assuming growth of five percent per annum consistently, consumption during 2020-21 would have been 22 MT. But, the actual for the year was substantially higher at 35 MT. This means that neither diversion stopped nor, there was any significant improvement in efficiency. Even now, if the promise can be kept, farmers won’t need more than 20 MT (35x0.7x0.8). This has startling implication for supply management.   

At current production of 25 MT, there will be surplus of 5 MT. India need not import even a ton (during 2020-21, it imported 10 MT) which would yield huge saving in foreign exchange and subsidy payments (Rs 20,000 crore). There will not be a need for any fresh capacity addition either; the country could have managed without the five revival projects (including Gorakhpur). That would have yielded additional subsidy saving of Rs 12,000 crore per annum.

As for SHC, this could achieve the desired objective provided the policy environment is supportive. However, it is not. Currently, the price of DAP Rs 24,000 per ton is 4.5 times that of urea Rs 5,360 per ton whereas for maintaining the desired balance in NPK use ratio, the former should not be more than twice the latter. In this backdrop, even if the SHC requires the farmer to use more of DAP and less urea, he/she will continue to use more of the latter as it is much cheaper and less of former as it is expensive.  

In view of above, it is abundantly clear that all is not well with the fertilizer sector.

Modi needs to get the policy right by removing control on urea and stop giving subsidy through manufacturers; instead, the government can give it directly to the farmers.

This will empower them to use subsidy primarily for fertilizer type needed more by the soil thereby help in reducing imbalance infertilizer use. By ensuring that no subsidized fertilizer product is available in the market, the new regime will kill the very incentive to divert. Moreover, by aligning urea demand to the actual need, this will reduce pressure to increase supply. There will also be drastic cut in subsidy outgo.

(The writer is a policy analyst. The views expressed are personal.)