The government must pursue indigenous sources of fertiliser raw materials to minimise India’s vulnerabilities on imports
The enactment of two laws viz. The Mines and Minerals (Development and Regulation) Amendment Act, 2023 and the Offshore Areas Mineral (Development and Regulation) Amendment Act, 2023 in the just concluded monsoon session of the parliament bodes well for the Indian fertilizer sector. While the first law paves the way for the auction of critical mineral potash (besides lithium and graphite) blocks for exploration and processing in India, the second provides a fixed 50-year production lease for offshore minerals.
Potash or ‘K’ is amongst the three major plant nutrients (the other two being Nitrogen or ‘N’ and Phosphate or ‘P’) needed for increasing production of foodgrains and other agricultural products. Its requirements are met ‘entirely’ from imports (these are sourced mostly from Belarus, Canada, Russia, Israel, and Jordan) as India doesn’t have its resources. This is primarily because our policymakers in the past never bothered to prop up indigenous exploration efforts.
Besides, the ecosystem under which the fertilizer industry in India operates hasn’t been conducive to driving companies to come up with innovative ideas that help in surmounting the deficiency of resources or optimally utilizing them. This, in turn, has to do with the obsession of successive political regimes to make fertilizers available at a low price, come what may.
For close to five decades, they have promised to deliver all types of fertilizers at low maximum retail price (MRP) unrelated to the cost of production and distribution which is higher. Now, if a manufacturer or importer is told by the government to supply at a low MRP without at the same time promising that he would be compensated for the excess of cost over it, he won’t. So, the latter commits to compensate the former for the excess by way of subsidy.
This has led to a ballooning fertilizer subsidy bill which hit a whopping Rs 255,000 crore during 2022-23 against a few hundred crore in the late 1970s when the subsidy scheme was introduced. Apart from increasing production and consumption of fertilizers, a paramount reason was escalating cost – most of it going to pay for heavy import bills (during 2021-22, the total value of fertilizer imports by India, inclusive of inputs used in domestic production, was US$24.3 billion or close to a mammoth Rs 200,000 crore).
During the initial stages, this approach could be justified as India needed to increase fertilizer use - in pursuit of its overarching goal of food security - on the one hand and supplying it mostly from domestic production on the other. Now, when fertilizer use has increased substantially (in fact, there is excess use of Urea, a dominant source of ‘N’ supply) and the domestic industry has also built up its production capabilities, it can’t be justified any more. Yet, the government continues giving wrong signals.
Farmers know that they will continue to get fertilizers at a low price, so they don’t bother to improve the efficiency of use. The manufacturers and importers know that excess of the cost of supplying fertilizers over the price paid by farmers would be reimbursed as a subsidy, so they don’t mind incurring higher costs. And, global suppliers know that even if they charge high prices, they won’t face demand resistance as the Union Government is there to pick up the tab.
Above all, there is no incentive (in fact, no compulsion) to even look for the possibility of finding raw material resources within the territorial bounds of India. When the Centre is more than willing to pay ‘any price’ for their imports however high (all coming from taxpayers’ kitty) thereby immunizing both the suppliers and the farmers from its consequences, why would anyone make efforts to look for them within India?
Another flaw in the policy approach deserves mention.
Before 1991 when a major economic crisis engulfed India, all fertilizer types (apart from urea, there are 22 grades of fertilisers being the source of ‘P’ and ‘K’, di-ammonium phosphate or DAP and muriate of potash or MOP are the most widely used) were meted out similar treatment in as much as all suppliers got subsidy on ‘firm specific’ basis. In 1991, when we sought the help of the IMF/World Bank, the latter insisted on the elimination of fertilizer subsidies within three years – as one of the reform conditions.
The then PV Narasimha Rao-led government settled for the removal of subsidy on ‘P’ and ‘K’ (call them non-urea fertilizers) even while retaining control and subsidy on urea. Those decisions were made effective from August 25, 1992.
But, within a little over one month i.e. from October 1, 1992, subsidy was restored on the former. Under its new incarnation, all suppliers of non-urea fertilizers were given a ‘uniform’ subsidy even as subsidy on Urea continued to be ‘firm–specific’.
Today, all fertilizer types receive subsidies. But, thanks to the control tab on urea it remains the darling of all political bosses whereas non-urea fertilizers are at the receiving end most of the time; courtesy of the de-control tab they got post–1992. Unlike the former, where increasing subsidies help keep MRP immune to cost hikes, the government generally does not adjust subsidies on the latter. This leads to an increase in prices of non-urea stuff as costs escalate.
Together with a step-motherly treatment non-urea fertilizers receive in other areas (for instance, they get reimbursement of freight cost only for movement from the factory/port to the rail-head, on urea, the entire freight cost for movement up to the retail point is given), this has led to an imbalance in fertiliser use. Thus, there is excessive use of ‘N’ vis-à-vis ‘P’ and ‘K’ even as the present NPK use ratio at 6.7:2.4:1 (against the desired 4:2:1) is tilted in favour of ‘N’. This, in turn, has led to a decline in crop yield, deterioration in soil health and adverse impact on the environment. Why can’t demand resistance for ‘P’ & ‘K’ fertilizers propel their suppliers to rethink their strategies?
This won’t happen as long as there is government intervention. For instance, even if a supplier brings MOP at a lower cost, the government can reduce subsidy; hence no incentive. That apart, since 2021-22, Modi has substantially hiked subsidies on non-urea fertilizers also to offset the steep increase in their cost triggered by the Ukraine war, as is the case with urea. During 2022-23, of the total subsidy bill Rs 255,000 crore, it spent Rs 86,000 crore on these fertilizers. This has only strengthened complacency amongst all stakeholders.
The aforementioned laws have the potential of attracting investment including by global fertilizer majors in the mining and processing of potash reserves particularly in Rajasthan (the state also offers good prospects for rock phosphate – the raw material for ‘P’ nutrient where also India’s import dependence is a high of 80-90 per cent) besides exploring these from under the sea.
The government must pursue indigenous sources of supplying fertilizer raw materials to minimize India’s vulnerabilities to total reliance on imports (with Russia and Belarus alone contributing 50 per cent of our potash imports, the Ukraine war has made us even more vulnerable). It should also overhaul the eco-system for fertilizers by dismantling the extant controls, giving suppliers pricing freedom and subsidies directly to farmers. It can use the money saved by stopping misuse – inherent in existing systems - to give incentives to firms engaged in mining.
(The writer is a policy analyst; views are personal)
