Fuel first, now fertiliser. Barely has the UPA recovered from political exertions over fuel pricing that there are reports of farmers across the country being affected by a shortage of fertiliser. And that, too, just before planting the summer kharif crop. In the medium term, this could mean a fall in agricultural output and further pressure on food prices. A mix of global and local factors explain the shortage. The global economy is experiencing a supply gap, partly because input costs of producers have risen sharply on cue from the soaring prices of crude oil. Locally, too, producers are cutting down on production and supply because of the government?s difficulty in footing a rising subsidy bill. But this problem is wholly created by the government?the distortions that flow from the official fertiliser policy. The government fixes fertiliser prices and subsidises manufacturers to the extent of the difference between this price and their cost plus an additional return on investment. Of course, now, increasing prices of crude oil and other inputs have sent the costs of producers soaring. The subsidy burden could thus be as much as
Rs 95,000 crore, which will be 1.9% of the projected GDP in 2008-09. Hence the dithering on paying out more subsidies.
Are the fertiliser subsidies justified by outcome? The short answer is no. Subsidies have skewed returns on investment, leading to zero addition to capacity in the Tenth Plan, despite the growing demand. The distorted incentive structure, which failed to adequately provide for the growing costs of transportation, distribution, marketing and sales of fertilisers, made the industry look at output expansion as a loser?s policy. Therefore, the government must now, in quasi-crisis times, shift focus to dismantling administered prices and phase out subsidies to fertiliser producers. The market mechanism will ensure that there are no shortages?because the demand is there and market prices will reward capacity increases. For reasons of access, the government should transfer cash to the poor and marginal farmers, who can then buy fertilisers at the market rate. Smart cards have been talked about for years, but the government has done little to implement this proposal. This is the time to direct government help to poor farmers and take it away from fertiliser producers.
