Direct Cash Transfer System for Fertilizers in India:

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1 Direct Cash Transfer System for Fertilizers in India: Why it might be Tough to Implement? Avinash Kishore, KV Praveen and Devesh Roy

2 High and rising subsidies : 4-5% of AgGDP of India 700 Fertilizer Subsidy in Billion Rs. ( Prices)

3 Fiendishly complex subsidy regime Varies by the type of fertilizer Firm-specific and import-consignment specific subsidies Companies could charge 5% extra for Neem-coated Urea Now, the mandate to manufacture neem-coated urea only

4 Who benefits from the subsidy? Fertilizer demand is price elastic Demand falls by nearly 6.4 percent for a 10 percent increase in fertilizer prices Incidence of a tax is higher on the party with higher price elasticity Manufacturers derive the most economic benefit : CEA Office Subsidy is politically sensitive

5 Who benefits from the subsidy? A common claim Large famers benefit more from fertilizer subsidies Large regional disparities 112 districts with > 200 kg/ha use while another 108 districts where use < 50 kg/ha Do they? Kg/ha of Urea Application by Holding Size Group % Share in Total Fertilizer Consumption N P K Marginal Small Semi-medium Medium Large

6 Increase in imbalance in application of N, P, K Nitrogen (N) Phosphorus (P) Potash (K)

7 Path to Direct Benefit Transfer 2012: Proposal to replace some of the subsidies with direct cash transfer to beneficiaries bank accounts verified by Aadhar 1 st Jan 2013: Soft launch of DBT for 0.3 lakh beneficiaries of 7 cash-based welfare schemes (pensions, scholarships, etc.) in 20 districts across 6 states of India Proposal to cover all districts of India by the end of th Nov. 2014: Pahal Scheme for DBT for LPG subsidy launched in 54 districts Universal DBT for LPG implemented by May World s largest DBT Scheme (97.5 million beneficiaries); widely considered to be successful 1 st April 2016: DBT launched for Kerosene in 26 districts Chhattisgarh, Haryana, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Punjab and Rajasthan

8 Challenges to DBT for Fertilizers : Identification of Beneficiaries Indian state does a poor job of identifying beneficiaries Up to 50% mis-classification in identification of BPL households in Karnataka (Niehaus et al, 2011) Remedies tried Universalization of benefits in PDS Self-selection mechanism in MGNREGS Appeals to conscience in PAHAL to voluntarily give up the subsidy (10.03 million of the million have complied) Fertilizer subsidy presents new challenges for identification of beneficiaries 757 million Aadhar cards have been issued But Aadhar does not list occupation, landholding or BPL status Land records are outdated, disputed and do not identify tenants Land fragmentation and hereditary divisions complicate the matter

9 Improving Land Records The Nilekani Committee recommended construction of a database with information on land holdings and type of crop(s) cultivated Land holdings and cropping patterns change; require frequent updating The National Land Records Modernization Program has been a non-starter in most states Only 4.1% of total available funds have been used in the 12 th plan period ~60% of farmers assets in land (DIS, 2013); harder to leverage in absence of transparent records Plight of tenants ~10% of land is wholly or partly leased-in; mostly by smallholders Issue for other programs too: like PMFBY, Diesel Subsidy Scheme in Bihar

10 Phase-wise shift : DCT to Retailers Extensive retail chain exists >0.26 million sales points for 140 million holdings Database of all retailers to be prepared in phase I Payment to be made based on the stocks held by the retailer only the total amount of sales will be recorded in a central database and not who gets the fertilizer in the end

11 Issues How to create a foolproof mechanism for verifying the existing stock with the retailers? What safeguards against mis-invoicing (including from collusion among agents) will be built into the system? Validation of stocks before DCT to retailers Working capital challenge for retailers if delays in payments Cartelization and emergence of local monopolies likely Higher risk of diversion of fertilizers to non-farm sectors and other countries Specially since ultimate beneficiaries not identified

12 Delivery of cash in time with minimal transaction costs Minimal transaction costs and timely payments are at the core of any cash transfer system Several DCT schemes exist already, but DCT in fertilizer will involve much greater flow of funds And a much larger number of beneficiaries (> 140 million holdings) <40,000 rural bank branches; <10% ATMs in rural areas; BCs still struggling to take-off 0.14 million rural post-office branches; 370 million rural mobile phones (2/3 rd of all rural HHs own a mobile phone); Mobile phone companies as payment banks spl. Since Aadhar has the mobile number 100 million Aadhar linked bank accounts under Jand Dhan Yojana

13 Other challenges : volatile prices Sharp rise in a short period is possible. 3-fold increase in prices of P & K since deregulation Indexing of cash transfer critical to protect its purchasing power Deflated ( 2005 dollars) International Price of Fertilizers (US$/mt) DAP TSP Urea MOP

14 Other Challenges: time sensitive and seasonal demand Timely delivery is critical to farmers The time-sensitive nature of fertilizer demand reduces farmers bargaining power vis-a-vis retailers Retailers working capital requirement will also go up in phase 2 because of seasonal demand

15 Other challenges: local level supply demand parity A successful DCT may alter fertilizer demand Demand supply match not that easy since the supply is inelastic in the short-run Demand supply mismatch overall or locally could create fertilizer price inflation Maintaining adequate stocks at the selling point and timely delivery essential to avoid this outcome Incentives to artificially create excess demand could exist at different points in the supply chain Need for a tracking system for the entire supply chain to spot artificial scarcities

16 Other Challenges: Effects on other input markets Fertilizer is only one of several inputs in agriculture The demand for various inputs is jointly determined. If demand and supply of fertilizers changes, it will also affect the demand for other related inputs like seeds, irrigation and pesticides How to design DCT for fertilizers to promote balanced use of fertilizers and the complimentary inputs?