When a subsidised product is not available in the marketplace, the dubious characters will have nothing to prey upon
It is budget time. After two years of splurge, Finance Minister Nirmala Sitharaman has alluded to a return to fiscal consolidation. A major area meriting attention is fertilizer subsidy which jumped from `80,000 crore during 2019-20 to `134,000 crore during 2020-21 and is likely to be `140,000 crore during 2021-22.
Fertilizer subsidy arises because the Union Government wants manufacturers/imports to sell fertilizers to farmers at a low maximum retail price, unrelated to the cost of production and import and distribution, which is much higher. In case of urea, it exercises mandatory control on MRP and reimburses the manufacturers for the excess of cost over it as subsidy on a ‘unit-specific’ basis under the new pricing scheme. In case of phosphatic and potassic (P&K) fertilizers, it fixes ‘uniform’ subsidy on per nutrient basis for all manufacturers and importers under Nutrient Based Scheme.
Subsidy per ton being the difference between cost and MRP, if the cost increases, MRP remaining unchanged, on each ton of fertilizer sold, subsidy will increase. On the other hand, if MRP decreases, cost remaining unchanged, then also subsidy will increase. Thirdly, for any given level of subsidy per ton, increase in the quantity of fertilizer sale results in higher total subsidy payment.
The factors impinging on the cost of urea are: cost of natural gas - feedstock/fuel used in its production andprice of imported urea (it accounts for 1/3rd of consumption). In case of P&K fertilizers, the factors are cost of raw materials, viz.,phosphoric acid, ammonia and price of imports in finished form viz.di-ammonium phosphate (these account for nearly 50 percent of DAP consumption) and price of muriate of potash - entirely imported.
Given the preponderance of imports in making urea and non-urea fertilizers available (even for producing domestic urea, 1/3rd of the gas requirement is met from imports), there is little that the Government can do to rein in these costs.
However, there are plant specific inefficiencies (besides inter-state variation in VAT on gas) that result in widely varying costs. Of around 35 million tonannual urea supply, there are tonnages suppliedat `20,000 per ton, `25,000 per ton, `30,000 per ton and so on. The cost of import is even higher. During the current year, some supplies have even come at US$ 900 per ton which works out to around `70,000 per ton at the farm gate.
A ridiculously low MRP of urea (currently at `5360 per ton, it is almost the same as two decades ago)in the face of increasing costlies at the root of increase in subsidy per ton. Add to this, the quantity boost that comes from (i) excessive use: low price prompts farmers to use more than what is required by the soil; (ii) large/rich undeserving farmersalso getting access to subsidized urea; (iii) large-scale diversion such as smuggling to neighboring countries, industrial use and so on - inevitable when the market price is 4-5 times higher. The outcome is ballooning total subsidy bill.
Excessive use is undesirable as it leads to imbalance in fertilizer use, erosion in soil health (this in turn, undermines the sustainability of agriculture in the medium to long-run) and adverse impact on the environment besides human health. Giving cheap urea to those (read: rich farmers) who can afford to pay more is also patently unfair. But, diversion or misuse of subsidized (albeit heavily) urea will shake the conscience of any right-thinking person. Yet, it has been going on for decades and could be as high as 30 percent.Look at the dynamics of how it is happening.
During the initial years of the subsisting scheme (it is in vogue since 1977), bulk of the subsidy amount was released to manufacturers on ‘dispatch’ of the material from the factory. Even as they were required to ensure that fertilizer was actually sold to farmers, there was no fool proof institutional mechanism to check it. Disappearance of the product at various levels in supply chain viz. rail-head, stocking point in district and retailer was rampant.
Ein the early 2000s, the arrangement was changed to provide for payment of 95 percent of the urea subsidy on receipt of material in the district (for non-urea fertilizers, the share was 85 percent) and balance 5 percent on confirmation by the state government (15 percent in case of P&K fertilizers). Under this mechanism also, the field was wide openfor dubious players to prey on the subsidized stuff - beyond stocking point in the district.
From April 2018, the Modi government linked subsidy payment to manufacturers to sale of fertilizers to farmers by retailers. Under the new scheme, manufacturers receive 100% of the subsidy after fertilizer is delivered to the farmer and his identity viz. Aadhaar is captured on electronic PoS machine at dealer’s shop. Though a significant improvement, even this is prone to diversion albeit at retail level. This is all the more because anyone(including non-farmers) with Aadhaar unique identity number can buy the subsidized product.
The government has also tried other measures. These include (i) mandatorily requiring all manufacturers/importers to neem-coatall of urea supplies (2015); (ii) restricting purchase by each purchaser to 100 bags per transaction (down from 999 bags earlier) and capping number of transactions per month (August 2020) and (iii) tracking top 20 urea purchasers in each district and initiating action against those violating purchase norms etc. These too have not delivered.
Now, the government is working on a plan to cap the number of subsidized fertilizer bags that individual farmers can buy in any cropping season.But,this won’t help either.
In fact, so long as the core of the scheme, i.e., ‘routing subsidy through the manufacturers’ remains intact, there is no way it can make any dent on the scourge of diversion.
The way forward is direct benefit transfer (DBT) of subsidy. The Government should give subsidy ‘directly’ to the farmers and allow manufacturers to sell at market determined price.This will completely eliminate diversion; when a subsidized product is not available in the marketplace, dubious characters will have nothing to prey upon.It will also curb excessive use; when, the product carries the right price tag, farmers will use it judiciously.It will also be possible to target subsidy to poor farmers only.
The contraction in demand from all three sources will yield huge saving in subsidy (quantity effect). There will be an indirect gain as well. India being a major importer of fertilizers, a significant demand-induced cut in import will reduce the international price and in turn, reduce the cost of imports. As a result, subsidy per ton will also decline.
To conclude, DBT will help fiscal consolidation, reduce trade deficit, reduce imbalance in fertilizer use, improve soil health, promote sustainable agriculture and environment friendly. There will be losers too: inefficient/high cost producers who will have to close their shop; dubious traders and corrupt politicians/bureaucratswho make big money from leakage/diversion; rich farmers whoare major beneficiaries of extant scheme.
DBT of fertilizer subsidy has been on government’s radar since 2012-13. So far, its launch has been stymied due to the clout of these lobbies. Can the Prime Minister surmount it?
(The writer is a policy analyst. The views expressed are personal.)
