The proposed nutrient-based fertiliser subsidy regime will bring in greater product differentiation by fertiliser companies, but won?t lead to a dramatic increase in prices, fertiliser secretary S Krishnan told FE.

In the new regime, the retail prices of fertilisers would be exposed to the market and not remain fixed like now, the secretary said. The subsidy per nutrient content will be determined in advance at the beginning of a financial year. ?The task is to ensure that the quantity of fertilisers is not compromised and also that prices don?t rise significantly,? he said.

The fertiliser ministry has sent a blueprint of the new subsidy scheme, approved by state secretaries, to a group of ministers. The GoM, headed by the finance minister, is studying the operational issues involved and the scheme?s likely impact on the fertiliser industry.

?The success of the new scheme would depend on how successfully the state government would bolster the extension of services,? the secretary said.

The fertiliser subsidy Bill in 2008-09 had shot up to an unprecedented Rs 1.17 lakh crore, fuelled by the steep rise in global prices of naphtha and urea. The Budget estimate of the subsidy for this fiscal is Rs 53,750 crore, but the fertiliser department expects an additional allocation of Rs 15,000 crore or so through the two supplementary grants.

The new subsidy regime envisages direct transfer of money to farmers from the next fiscal. The current thinking is to link direct transfer with the rural employment guarantee scheme, Krishnan said. Towards this, about 5 crore bank account of farmers under the NREGA will be tapped. Of this, about 2.5 to 3 crore accounts are held by small and marginal farmers. This segment can be identified through job cards.

?On the basis of these cards, coupons will be issued. The coupons will be tradable through banks, and subsidy will automatically be reduced to an income subsidy, free from distortions,? the official said.

?The draft plan containing computerised land records prepared by the department of land resources, under the rural development ministry, will be used as a database,? the official said.

Then, the government will not have to go into the cost structure of the manufacturing units. Only production and sales of fertilisers will have to be monitored for payment of subsidy per tonne of nutrient. So, it will be a simple and transparent mechanism that is easier to operate, requiring less time, energy and manpower by government and the industry.

Unshackling the industry will also attract fresh investment into the sector which has otherwise been unattractive for more than a decade.

A fertiliser ministry official said, ?A blueprint on the new subsidy scheme has been forwarded to a GoM, which has been examining operational issues such as measures for rationalisation of disbursement and apprehensions amongst the high-cost urea units to be out-priced in the market following introduction of an open MRP.?

Nearly 13 naphtha- and fuel oil-based units would be out of operation if not nursed with special support for a limited period to facilitate their survival under the new regime.

The contents of the blueprint were also discussed at a meeting of the secretaries from states convened by the department of fertilisers in August. The representatives from almost all states were unanimous that there is not a practical hitch in the scheme?s implementation. However, this would be a political call. The decision has to be implemented by the states only, the official said.

He said subsidy levels will be adjusted gradually to allow increase in MRP in small doses without affecting fertiliser consumption to acclimatise farmers to pay market-determined prices. This will pave the way for total decontrol.