Column : Missing links in the fertiliser subsidy scheme

Written by Uttam Gupta | Updated: Jan 11 2013, 06:47am hrs
In the Budget for 2012-13, the finance minister had announced tracking the movement of fertilisers from retailer to farmers and linking part of subsidy payment to manufacturers to the sale of fertilisers to farmers by retailers.

Under the extant dispensation, 85-90% of the subsidy amount (fixed amount on DAP and NP/NPK fertilisers and excess of cost over controlled MRP for urea) is paid to manufacturer on receipt of material in district.

From November 2012, producers are to get subsidy payments only on confirmation of receipt of fertiliser by the retailer. Actual payments are, however, stuck as the department of fertilisers (DoF) has no money, having exhausted allocated funds. In the mid-year economic analysis of 2012-13, the finance ministry came out with a blueprint on the modalities for implementing the Budget announcement. Pilot projects in 10 districts spread over nine states will be launched.

After successful implementation in these 10 districts, cash subsidy will be transferred to farmers in the next phase from April 1, 2013. Concurrently, tracking the movement of fertilisers will be rolled out in the whole country. The DoF has developed a mobile and web application, a mobile Fertiliser Monitoring System (m-FMS) that provides information about stock position, sale and receipt of fertiliser till the last retail point.

A group headed by Nandan Nilekani had mooted a system by which the government would credit the subsidy to the account of the dealer even as the latter pays the market-based price to the manufacturers and sells to farmers at a subsidised price. Before crediting the subsidy to the dealers account, authorities have to ensure that he has delivered the fertilisers to the farmer. The tracking system is meant primarily to facilitate this authentication.

There is a huge time gap between when the dealer buys fertilisers and he receives the subsidy amount. Can he afford to block funds, which can vary from 1.5-2 times the MRP depending on fertiliser type Who bears the interest cost

Due to inadequate budget allocation, there are delays in subsidy payments to producers. For instance, during the current year, payments are stuck for five months (the R60,000 crore allocated was exhausted in July 2012).

The fertiliser industry has faced this problem for decades. Outstanding subsidy dues year-after-year have dented its margins. Producers have even lost heavily on fertiliser bonds they got in lieu of subsidies. Such problems will dog dealers, too. They do not have the stomach to live with the liquidity crunch caused by delays in payments. Unlike fertiliser firms, they do not have an option of receiving bonds. Fertiliser demand and consumption is seasonal. If the monsoon fails and farmers do not turn up to buy, dealer wont get a subsidy. They may have to wait till next season when demand is resurrected.

In short, such a system is pregnant with a real possibility of the entire fertiliser distribution network collapsing. At another extreme, one cannot rule out payments to fictitious dealers. Therefore, it was only logical that the government did not accept this recommendation of the Nilekani panel. As the next logical step, it ought to drop the idea of tracking the movement of fertilisers. Such an exercise is totally redundant as payment to dealer is not contemplated.

The government may argue that this is needed in the context of payments, albeit partial to manufacturers. It is a precursor to the eventual switch-over to direct cash transfers (DCT) to farmers. This perceived linkage is illogical. DCT is a radically different scheme intended to replace the existing dispensation. With the former being put in place, the latter has to go. And, when this happens, tracking looses meaning. Under DCT, manufacturers/dealers are expected to sell fertilisers at market price. And farmers get compensated directly by the government crediting the subsidy to their accounts.

Therefore, the government should rightfully focus on steps that are needed to get best results from DCT. Thus, control on urea price should go and producers made free to set price competitively.

Currently, urea sells at R270 per bag (50 kg) as against MOP & DAP selling at R850 and R1,200, respectively, due to much lower subsidies under the nutrient based scheme (NBS). This has led to excessive use of urea and an imbalance in nutrient use. With the removal of controls, prices of all fertilisers will be aligned, thus knocking at the very source of the imbalance. With the subsidy in his account, the farmer can make his own choice on which nutrient to buy, how much, etc. Indian agriculture will move towards a more balanced fertiliser use. This will create a perfect environment whereby farmers get their soil analysed and use only those fertilisers that the soil/crop needs. There will be other positives spin-offs. The control on MRP has artificially boosted urea demand, which is currently 30 million tonnes (MT). A huge deficit 8 MT is met from imports, entailing a subsidy of R20,000 crore! With price rising to reflect true cost, demand will be adjusted to a realistic level. India may not have to import at all, thus conserving foreign exchange and making available a huge saving in subsidies. All this will happen without compromising on crop yield. This is because there is ample scope for increasing efficiency of fertiliser usearound 50-60% according to a study.

Under the existing scheme of routing subsidies through producers, all farmers (including rich and those growing commercial crops) reap its benefits. Under DCT, the government will restrict this to poor/small and marginal farmers. That will yield further substantial savings in subsidies. According to Ashok Gulati, taking 85% farmers as small and marginal, the government can save around R15,000 crore.

However, authorities need to take necessary steps to ensure that (i) all poor farmers are correctly identified, (ii) money reaches their bank accounts much in advance of their purchasing fertilisers and (iii) the subsidy amount is revised promptly to offset any increase in prices.

The author is executive director, CropLife India. Views are personal