1. Column: Unshackling the fertiliser sector

Column: Unshackling the fertiliser sector

Direct cash transfer to farmers can save Rs 10,000 crore by stopping the diversion of urea for non-agricultural use

By: | Updated: December 11, 2014 2:31 AM

Fertiliser subsidy is budgeted at R72,970 crore in FY2015. There are also pending bills of R30,000-35,000 crore that need to be cleared on account of this subsidy. Together, it easily amounts to more than R1 lakh crore, and that works out to more than 10% of the Centre’s tax revenue—quite a substantial pressure on the fisc.

Unduly low prices of urea, at R5,360/MT (about $86/MT at an exchange rate of R62 to a US dollar), account for nearly two-thirds of this subsidy. Globally, prices hover around $300/MT, although country-specific prices vary widely. In China, urea is priced at $265/MT while in Pakistan, it is at $362/MT, in Bangladesh, at $207/MT, in Indonesia, at $148/MT, and in the Philippines, at $462/MT. Indian urea is perhaps the lowest-priced amongst the large economies of the world. This is leading to misuse of urea: diversion to non-agricultural uses as well as being smuggled into neighboring countries. There are no firm estimates, but insider ‘guesstimates’ of this range between 10-20% of urea distributed in the country.

india-graph

With the implementation of the Nutrient Based Scheme (NBS), the prices of DAP and MOP have shot up to almost four times that of urea. As a result, the overuse of urea in agricultural fields is rampant. Against a generally-considered-desirable ratio of 4:2:1 of NPK-use, in Punjab and Haryana, the ratio was 62:19:1 in 2012-13. This reduces the grain-to- fertiliser response ratio, leading to much lower returns from fertiliser application.

The rising subsidies, and the delays in payment of these subsidies to specific plants, has created an environment of uncertainty in the fertiliser industry. As a result, domestic investments in the fertiliser industry have lagged behind and imports have surged. As an example, between 2000 and 2012, while Indian domestic production of nitrogenous fertilisers moved marginally up from 10.9 MMT (in nutrients) to 12.2 MMT, China moved from 22 MMT to 50 MMT, as the accompanying figure shows.

In brief, India has landed its fertiliser sector in the mess of rising subsidies, lagging investments, rising imports, highly imbalanced use of NPK, and the diversion of urea to other countries and for uses other than agriculture. This is largely a result of administered-pricing and subsidy policies, particularly of urea.

How can the Indian fertiliser sector be put back on track? Raising urea prices, say, by 200%, seems an obvious choice. But if it were so simple, it would have been done long back. Despite several committees having recommended this, it has not been accepted by the governments of the day. Politically, raising urea prices by about 200%in a single shot, or even in a 3-5 year period, doesn’t seem to be a feasible option, unless this increase is accompanied by substantial increase in the MSPs of staples like wheat and rice. Take the case of Pakistan and China; while their urea prices are way higher than in India, they also offer much higher MSPs for certain crops. In Pakistan, the MSP for wheat is $320/MT and in China, $385/MT, against India’s $226/MT. Fertiliser cost in Punjab accounts for about 7% of the MSP of wheat. If one adjusts for this, the Indian farmer is in a situation of great disadvantage. If the price of urea is raised by even more than 200% or so, taking it from $86/MT to nearly $265/MT—the price Chinese farmers are paying—while the MSP of wheat is also raised from $226/MT to, say, $385/MT (what the Chinese farmer is getting) or even $320/MT (what the Pakistani farmer is getting), the Indian farmer would be more than happy. So, politically, such a proposal can sail through. But given the National Food Security Act, 2013, which promises wheat and rice at R2-3/kg, this MSP rise will lead to explosive growth in food subsidy and further distortion in cropping patterns, with the latter getting skewed in favour of wheat and rice. India may end up being worse-off.

Another option could be to simply transfer cash to farmers equivalent to the current fertiliser subsidy. This works out to roughly R5,000/ha (the subsidy amount, R1 lakh crore, divided by the gross cropped area, of about 20 crore ha). Farmers with holdings of below 4 ha can be given the subsidy entitlement in direct cash transfers at a rate of R5,000/ha while those with above 4 ha can get it at a rate of R4,000/ha. Then, deregulate the entire fertiliser sector, with imports flowing freely at zero duty. The direct cash transfer can be made through the Jan Dhan
Yojana, with Aadhaar linkage. Politically, this is feasible, and will lead to a saving of at least R10,000 crore, if not more, by simply stopping the diversion of urea for non-agricultural uses and its smuggling into other countries. It will also give the right signal to the farmer on the balanced use of NPK, thereby raising the productivity of fertiliser use. The only condition that should be imposed on the farmers (beneficiaries) is that they have to get their soils tested every 3 years.

What would happen to our fertiliser industry under this brave new world of total decontrol? The probability is high that it can expand and prosper, provided urea plants are given gas at a uniform price (may be a pooled price of import parity and domestically-produced gas). It will incentivise them to become more energy efficient, get the best technologies and compete with those in China or elsewhere. There could be mergers and acquisition within the urea industry, but overall, the industry will feel liberated and unshackled from myriad controls. And the industry captains today feel that they are ready to walk this path of freedom. Is the government ready to take a call?

The author is Infosys chair professor of agriculture at ICRIER

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