MAINS 2016 CURRENT AFFAIRS GENERAL STUDIES 3 53. FERTILISER SUBSIDY HISTORICAL ASPECT In 1967, then-prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities. Those seeds required chemical fertilisers to maximise yield. The challenge was to make fertilisers affordable to farmers who lacked the cash to pay for even the basics food, clothing and shelter. Back then, giving cash or voucher to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So, the government paid subsidies to fertiliser companies, who agreed to sell for less than the cost of production, at prices set by the government. FERTILISER SUBSIDY AND PRICING POLICY The fertilisers policy revolves around the twin principles of controlling maximum retail price (MRP) at a low level and assuring producers a retention price (RP) which is higher. The difference is reimbursed as subsidy. Initially, all fertilisers (urea, DAP (Di-Ammonium Phosphate)/complex and Single Super Phosphate(SSP)) were covered under a uniform policy dispensation of retention price scheme (RPS). In 1991, faced with an economic crisis, India approached the IMF/World Bank who insisted on elimination of fertiliser subsidy within three years as a precondition for extending financial support. To comply with this, on August 25, 1992, the Government decontrolled DAP/complex fertilisers and SSP and abolished subsidy. However, within five weeks, subsidy was resurrected as ad-hoc concession. Controls on MRP too were revived, although indirectly. To begin with, States exercised control, after which the baton passed on to the Central Government. From April 1, 2010, these fertilisers were brought under the Nutrient-Based Scheme (NBS). Under NBS, the Government gives uniform subsidy to all manufacturers, expressed as Rs. per unit nutrient Nitrogen (N), Phosphorous (P), Potash (K) and Sulphur (S). Initially, producers were given freedom to fix the MRP but subsequent actions severely undermined this. Since 2013, the Government has been fixing reasonable MRPs and manufacturers who charge more are penalised by being denied subsidy for the differential amount or the concerned product being excluded from NBS. The case of Urea is very different. The policy governing it has remained unaltered since 1992, thus creating a serious anomaly/incongruity vis-à-vis decontrolled P and K fertilisers. Government sets a controlled Maximum Retail Price (MRP) at which urea must be sold to farmers. 1. Government provides a subsidy to 30 domestic producers that is firm-specific on a costplus basis, meaning that more inefficient producers get larger subsidies. 2. It provides a subsidy to importers that is consignment specific; 3. Imports are canalised only three agencies are allowed to import urea into India. Although a recommendation was made in 2012 to bring it under NBS and a committee asked to work out the modalities, nothing has come of it to date. NEO IAS 0484-4030104, 9446331522, 9446334122 Page 1
Continued trembling over reforms in urea on the one hand and drastic reduction in subsidy on P and K fertilisers on the other has produced a deadly cocktail. This has spiked the prices of P and K fertilisers three-four times since 2010 even as the MRP of urea increased by a meagre 10 per cent. Currently, DAP sells at Rs. 22,500 a tonne four times the urea price of Rs. 5360 a tonne. One of the important reforms been implemented in the fertiliser sector was neem coating of urea, which has likely reduced the diversion of fertilizer meant for farmers. Neem coated urea gives higher crop yields and is not required in high quantities while using the same plot size as other urea variants. Underground water contamination due to leaching of urea also gets reduced since nitrogen in the neem coated urea gets gradually released to plants. This variant of urea is not fit for industrial use, so chances of its illegal diversion to industries will also be lesser. RECENT DEVELOPMENTS The government budgeted Rs 73,000 crore, about 0.5 per cent of GDP, on fertilizer subsidies in 2015-16. Nearly 70 per cent of this amount was allocated to urea, the most commonly used fertiliser, making it the largest subsidy after food. The department of fertilisers (DoF) has not implemented various Cabinet decisions such as allowing increase in fixed cost to urea manufacturing units and reimbursement of marketing margins incurred by them. Seeking legal recourse against the administrative ministry should be the last option and industry would exercise it only under extreme compulsions. However, the Fertiliser Association of India (FAI) has had to take to legal recourse on a number of issues. Even court verdicts are ignored. The directive of the Delhi High Court on reimbursement of marketing margin to urea units went unheeded. The FAI was compelled to file a contempt petition. Phosphoric and potassic fertilisers have been denied domestic gas supplies despite a government directive to this effect. In a surprise move, the ministry of petroleum and natural gas has recently issued a directive to GAIL to charge the highest re-liquefied natural gas rate from manufacturers of phosphatic and potassic fertiliser. This would render domestic gas-based complex fertiliser amongst the costliest globally, to the manufacturers detriment. Ironically gas supply to non-priority sectors such as steel and petroleum will continue at much lower prices. The Centre has slashed the subsidy rates of phosphatic and potassic (P&K) fertlisers for the next fiscal with an estimated outgo of Rs. 21,274 crore for the year. The revision is in response to a decreasing trend in global prices of finished fertlisers and raw materials. Among the four nutrients in phosphatic and potassic fertilisers, the subsidy rate for nitrogen (N) and phosphorous (P) has been reduced the most. For sulphur (S), however, the subsidy rate has been slightly increased. The next financial year will see the government s subsidy bill reduce by around Rs 10,000 crore thanks to the cut in the nutrient based subsidy rates and the low price of gas, according to Crisil. DBT IN FERTILIZER SUBSIDY After successfully implementing the direct benefit transfer (DBT) in LPG, Union Government had announced a pilot project for implementing the direct benefit transfer (DBT) in fertilizer subsidy in the 2016-17 budget. This pilot DBT is little different from the others such as for subsidised foodgrains and LPG connection. Moving away from its initial plan for direct cash benefit transfer (DBT) of fertiliser subsidy to farmers, the government is now considering a two-pronged approach while the subsidy NEO IAS 0484-4030104, 9446331522, 9446334122 Page 2
payment will continue at the producer level, farmers will be identified using a mix of their Aadhaar number, soil health card and land records. This is aimed at better identification of beneficiaries and providing them with the right mix and quantity of nutrients. The sales of fertiliser will be made through point of sale machines to prevent leakages and ensure that actual sales are made, in a way akin to DBT in kind, like in the case of food subsidy. The fertiliser subsidy will not be in the lines of direct benefit transfer in cooking gas at the retail level. Instead, the idea is to identify the farmer and his land and allocate the right amount and kind of fertiliser depending on his land record and soil fertility. A pilot study has already been conducted successfully in Krishna district in Andhra Pradesh and similar studies are now being carried out in 16 districts across the country before it is rolled out on a larger scale. In the case of fertiliser subsidy, it is not always possible to pay at the retail level as identification of marginal or landless farmers is difficult. In such cases, or those where bank details are not available, how to transfer the subsidy in their accounts is the main challenge. And the implementation of DBT for fertiliser subsidy is getting delayed and a major challenge highlighted is identification of beneficiaries since land records are neither accurate nor updated in many States Hence the districts were selected from across the country where penetration of Aadhar, Jan Dhan and banking through ATM is more. More digitisation of land record is also one of the criteria for selection. While bigger districts such Krishna in Telangana could be such candidates, about four districts of Bihar and West Bengal bordering Nepal and Bangladesh besides a couple of districts from North East will be taken up. Districts bordering Nepal and West Bengal are being included since there are reports of subsidised urea is smuggled in huge quantity to these countries for industrial use. It is cautioned that a cross country implementation of the proposal could take at least one year as it will require giving soil health cards to all 14 crore farmers as well as seeding land records with the Aadhar numbers. The IT infrastructure is yet to be created. Enrolments for soil health cards are already going on while seeding with Aadhar number is also to be done. The government will implement the DBT scheme for fertilizer as soon as the results of the pilot project is analyzed. GAINS OF DBT IN FERTILIZER SUBSIDY By removing product subsidy and transferring the money directly to farmers, diversion of subsidies can be fully prevented. The current system gives rise to black marketing and use of fertilisers in sectors apart from farming as well. Direct cash transfer will also give farmers more purchasing power and the opportunity to choose fertilisers they consider best for their soil and crop. This will help in government s agenda for effective implementation of soil health cards and vision of increasing productivity thus enabling sustainable agriculture. Further, since more than 60 per cent of total fertilisers are imported, the global market sentiments are likely to be impacted positively in favour of buyers. Global suppliers will have to invest heavily to promote and educate farmers about their products. This is not happening today as demands are driven by the subsidy element. More importantly, DBT is likely to provide the much-needed trigger for the introduction of more efficient products, which eluded farmers in India due to product subsidy. Slow release fertilisers, 100 per cent water-soluble fertilisers and customised fertilisers used in developed countries will be available in India. This will not only increase the crop productivity but also arrest soil degradation. Quality of fertilisers in general will also improve as farmers will have more products that are not bound by the subsidy factor. NEO IAS 0484-4030104, 9446331522, 9446334122 Page 3
The industry is an ideal subject for direct transfer of subsidy which will not only stop leakage but also avoid unnecessary paper work. Enabling direct transfer of subsidy will help the government and farmers, and enhance soil health as well. CONTROVERSIES OVER FERTILIZER SUBSIDIES India has been providing farmers with heavily subsidised fertilizer for more than three decades. And following are the controversies: a) The issue is that how much of it is going in the pockets of farmer and how much to fertilizer companies. b) Another issue is that how much is going to small, needy farmers and how much to the large farmers. The Economic Survey said only 35 per cent, about Rs 17,500 crore of the total urea subsidy of Rs 50,300 crore, reaches the intended beneficiaries small and marginal farmers. c) How much of subsidy is going to well-developed regions and how much to less developed regions. d) There is also concentration of crops which use subsidies and that is rice, wheat, cotton and sugarcane. e) There is a big problem of excess usage of urea over phosphorous and potassium fertilisers. f) There are large subsidies based on end use only agricultural urea is subsidised which creates incentives to divert subsidised urea to industry and across the border. In fact, subsidised urea suffers from 3 types of leakage: (i) 24 per cent is spent on inefficient urea producers (ii) of the remaining, 41 per cent is diverted to non-agricultural uses and abroad; (ii) of the remaining, 24 per cent is consumed by larger presumably richer farmers. These leakages imply that only 35 per cent about R17500 crore of the total urea subsidy of Rs.50300 crore reaches the intended beneficiaries, small and marginal farmers. g) Under-pricing urea, relative to other fertilisers, especially P & K, encourages overuse, which has resulted in significant environmental externalities, including depleted soil quality. The overuse of one type-urea is so degrading the soil that yield on some crops are falling and import levels are raising. The country now produces less rice per hectare than its far poorer neighbours; Pakistan, Sri Lanka, and Bangladesh. h) Discrimination in the allocation of gas at two levels: between the fertiliser and other sectors, and between urea and non-urea fertiliser makers. These policies will aggravate the growing imbalance in the NPK (nitrogen, phosphorus, potassium) usage. i) No fresh investment has been made in this industry for close to two decades. j) The procedure to reclaim subsidy and freight in the phosphatic sector is cumbersome. k) Single superphosphate (SSP) is the appropriate fertiliser for small and marginal farmers but the subsidy is not conducive to the promotion of SSP usage. At least 3 million tonnes of SSP can be used in addition to the current levels. This will bring down imports of diammonium phosphate by at least 2 million tonnes annually CORRECTIVE STEPS/REFORMS The government should: Implement its own policy pronouncements in letter and spirit Implement the High Court orders to reduce unnecessary litigation. Decontrolling/decanalising urea imports to increase the number of importers. Decanalising imports will ensure timely availability of fertilisers, this will reduce the likelihood and severity of shortages, decrease black marketing and thereby benefit the small farmer. Universal direct benefit transfer (DBT) to farmers based on biometric identification with physical offtake can reduce diversion of urea. Fertiliser is a good sector to pursue JAM (Jhan Dhan Yojana- Adhaar Mobile No.) because of a key similarity with the successful LPG NEO IAS 0484-4030104, 9446331522, 9446334122 Page 4
experience; the centre controls the fertiliser supply chain. While many details will need to be worked out, the time is ripe for starting the DBT experiment in fertiliser. This would help the poor farmers, reduce leakage and also reduce the government s subsidy burden, releasing resources to plough back into agriculture in a way that can help a greater number of poor farmers. Introduce major reforms in urea policy to implement NBS in place. It would allow domestic producers to continue receiving fixed subsidies based on the nutritional content of their fertiliser, while deregulating the market would allow domestic producers to charge market prices. This would encourage fertiliser manufacturers to be efficient, as they could then earn greater profits by reducing costs and improving urea quality. And this in turn would benefit farmers. Accord top priority in allocation of domestic gas to fertilisers, and, within the fertiliser sector, equal treatment for both urea and non-urea fertilisers. Create a level playing field for domestic fertiliser players and instil confidence among investors. Urea price has to go up at least 15 per cent as it is highly subsidised and is at one-fourth the world price. This leads to excessive use of urea and imbalanced fertiliser application. Prices have to be increased gradually over the next four years and subsidy levels reduced. Set a cap on the number of subsidised bags each household can purchase and require biometric authentication at the point of sale (POS). Requiring biometric authentication would make it harder to conduct largescale diversion. It would improve targeting. Small farmers would still be able to get all their urea at subsidised prices but large farmers may have to pay market prices for some of the urea they buy. The ultimate objective should be to protect domestic investments, achieve self-sufficiency in agricultural production, and ensure food security. MODEL QUESTION 1. In view of the indiscriminate use of chemical fertilisers in India, suggest policies that encourage proper and balanced use of plant nutrients. Critically evaluate the present situation of fertilizer sector in India. NEO IAS 0484-4030104, 9446331522, 9446334122 Page 5