The fact is that non-urea fertilisers, in practice, have consistently remained under regulatory control

In an office memorandum dated January 17, 2024, the Department of Fertilisers (DoF) has issued detailed guidelines for the evaluation of “reasonableness” of the MRPs (maximum retail price) for all non-urea fertilizers covered under the Nutrient Based Scheme (NBS). To be effective from April 1, 2023, the guidelines prescribe maximum profit margins that will be allowed for fertilizer companies - 8 per cent for importers, 10 per cent for manufacturers and 12 per cent for integrated manufacturers (those producing finished fertilizers as well as intermediates such as phosphoric acid and ammonia).

The admissible profit margins will be calculated as a percentage of their “total cost of sales”, which covers the cost of production (landed cost in case of import), administrative overheads, selling and distribution overheads, and net interest and financing charges. Deduction for the dealer’s margin will be allowed to the extent of 2 per cent of the MRP for di-ammonium phosphate (DAP) and muriate of potash (MOP), and 4 per cent for all other fertilizers covered under the NBS (there are 20 grades of such fertilizers carrying nitrogen or ‘N’, phosphate or ‘P’ and potash or ‘K’ nutrient in different proportions).  

Companies earning “unreasonable profit”, i.e. over and above the stipulated percentages, in a financial year (April-March) or FY will have to refund the same to the DoF by October 10 of the following FY. If they don’t return the money within the said time limit, “an interest @12 percent per annum would be charged on a pro-rata basis on the refund amount from the next day of end of FY (i.e. in case of FY 2023-24, the interest would be charged from April 1, 2024),”. The unreasonable profits would also get adjusted against subsequent fertilizer subsidy payments by the government.

The guidelines require fertilizer companies to “self-assess” unreasonable profits, based on the cost auditor’s report along with audited cost data approved by their board of directors. This report and data have to be furnished to the DoF by October 10 of the following fiscal year. The DoF will then scrutinize the “reasonability of MRPs”, as submitted by the companies, “by 28th February for each completed previous FY (i.e. for FY 2023-24 by 28th February 2025)”.

Following this scrutiny, the DoF will finalize a report on unreasonable profits earned, if any, to be recovered from the companies. All controls on non-urea fertilizers including controls on their pricing were removed way back in 1992 allowing the individual companies selling them to fix their prices based on market forces. Then, how come the government controls their MRPs?

To make fertilizers affordable to the farmers, the Centre has all along asked manufacturers/importers to deliver all fertilizers at low MRP unrelated to the cost of production/import and distribution which is higher. The excess cost over MRP is reimbursed as a subsidy to the manufacturers/importers.

Before the 1991 economic crisis, suppliers of all fertilizer types got subsidy payments on a ‘firm-specific’ basis. Put simply, each firm got a subsidy equal to ‘the cost incurred by it minus MRP’. In 1991, when the government sought the help of the IMF/World Bank, the latter insisted on the elimination of fertilizer subsidies within three years. Pursuant to this, effective from August 25, 1992, the then PV Narasimha Rao-led government removed controls on non-urea fertilizers even while retaining controls and subsidies on urea. Sans subsidy support, suppliers of non-urea fertilizers were forced to increase their MRP steeply which led to debilitating effects on their use by the farmers. Faced with a huge backlash, within a little over one month i.e. from October 1, 1992, the government restored the subsidy calling it ‘ad-hoc concession’.

Unlike the earlier dispensation when there were as many subsidy rates as the number of firms, post-October 1, 1992, it was a single ‘uniform’ concession for all. The concession for domestic manufacturers was higher than the concession allowed to importers. Moreover, with subsidies back, price controls were resurrected. Until the end of FY 1996-97, these controls were exercised by state governments. Since 1997-98, the Union government fixed the selling prices. Although, through an order dated August 28, 1998, the Union government allowed manufacturers/importers the freedom to fix prices, this was withdrawn in less than a month, through another order dated September 23, 1998.           

The ‘ad-hoc concession’ Scheme for non-urea fertilizers along with price controls (albeit indirect) continued till March 31, 2010. Effective April 1, 2010, the government introduced the Nutrient Based Scheme (NBS).

Under NBS, it pays a fixed per-ton subsidy on each of these fertilizers, linked to their nutrient content or specific percentage of N, P, K and sulphur (S). This time again, it gave manufacturers and importers freedom to fix selling prices. This freedom too was short-lived as beginning FY 2012-13, controls were back.   

In a DoF office memorandum dated June 25, 2015, on “Implementation of NBS policy for P&K Fertilizers and revision in NBS rates for 2015-16”, Clause 5 required companies to submit certified cost data as directed by the DoF from time to time and report the MRP of P&K fertilizers regularly. Further, Clause 6 of the memorandum required them to print MRP along with applicable subsidy on fertilizer bags clearly. Any sale above printed MRP will be punishable under the Essential Commodities Act (ECA).

In view of the above, despite de jure decontrol effectuated more than three decades ago (1992), the selling prices of non-urea fertilizers have been under control barring a brief period of two years (2010-11 and 2011-12) and two months (August 25 – September 30, 1992, and August 28 - September 23, 1998). Against this backdrop, the guidelines issued through the DoF office memorandum dated January 17, 2024, should come as no surprise. The moot question is:-Why despite decontrol, the government control their prices? The answer is simple.

When it gives a subsidy to the supplier, it expects the latter to pass on the benefit to the farmer by reducing the subsidy amount from the cost of supply. So, it wants to look at the cost and make sure that MRP equals ‘cost minus subsidy’ say ‘X’. If MRP is higher than X, then the price is considered unreasonable and action as mentioned in the January 17, 2024 memo will follow. But, there is a flaw in this approach. 

To unravel this, let us look at some numbers.

Today, the subsidy on DAP is around Rs 18,000 per ton. Assume, that firm A incurs the cost of Rs 45,000 per ton whereas for firm B, the cost is Rs 40,000 per ton (due to its higher efficiency in production and distribution). Going strictly by DoF’s formula, ‘A’ should fix MRP at Rs 27,000 per ton whereas ‘B’ should charge only Rs 22,000 per ton. What if ‘B’ also fixes MRP at Rs 27,000 per ton? DoF could be treated as ‘unreasonable’!    

The problem with controls is: that these don’t reward efficiency or penalize inefficiency.

Already, Urea which is de jure under control and each firm gets unit unit-specific subsidy suffers from this flaw. The NBS scheme for non-urea fertilizers is also being administered in the same manner. Such a system is also prone to nepotism and corruption. 

The government should control all fertilisers and let all manufacturers and importers compete with each other to deliver plant nutrients at competitive prices. The subsidy should be given directly to the ‘needy’ farmers only using DBT mode.   

(The writer is a policy analyst; views are personal)