Fertiliser subsidy may be revamped to maintain fiscal prudence

Concerned over the ballooning of fertiliser subsidy, the Economic Advisory Council (EAC) to the Prime Minister has suggested a gradual phasing out of the subsidy to the sector. The move might look unlikely due to political compulsion, but the Council has said that it is a financial compulsion and ?pragmatic economic management? required it.

EAC member Satish C Jha told FE that he had suggested to the finance minister that a gradual phase out of the fertiliser subsidy would be necessary given the fiscal constraints of the government.

The Budget for 2008-09 is likely to announce a restructured fertiliser subsidy package to help the government maintain fiscal prudence, he said.

Citing the examples of Pakistan and Indonesia who discontinued fertiliser subsidy, Jha said as a former director and chief economist of Asian Development Bank (ADB) he had recommended to these two countries to phase out subsidies to tide over the financial crisis in the countries. It has been found that stopping subsidies did not in any way hurt productivity in both these countries, he said.

The Department of Fertilisers (DoF) has sought Rs 50,000 crore from the Finance Ministry for the 2008-09 fiscal for paying out the fertiliser subsidies.

The 2007-08 Budget had allocated Rs 22,450 crore for the payment of the subsidies.

It may be mentioned here that Prime Minister Manmohan Singh too had sought a review of the food and fertiliser subsidies and see if it would be financially sustainable to continue it.

Finance minister P Chidambaram had also indicated a restructuring of the existing subsidy regime. He said this was necessary as the ministry is not in a position to provide for more resources.

The Parliamentary Standing Committee also had said that food and fertiliser subsidies should be restructured and the government should make sure that these should profit the farmers and the people.

A study by the National Institute of Public Finance and Policy (NIPFP) showed that over the past 20 years nearly 38% fertilizer subsidies have gone to industry and only 62% has trickled down to farmers, particularly, the rich ones.

The subsidy delivery system is also flawed. Subsidy is the difference between production costs plus margins (12% return on investment) and the government-fixed minimum retail price. This means the government pays bigger subsidies to more inefficient producers.