Taking the DBT route for disbursing subsidies and bringing urea under the NBS scheme will help
One of the top economic priorities of the Narendra Modi-led government is reflected in its Make-in-India campaign, trying to boost manufacturing sector. Much of the efforts to attract foreign direct investment are also geared towards that end.
But here is a critical sector—fertilisers—which has not seen any major fresh investments for the last 15 years or so, and some of the urea manufacturing players are seriously thinking of pulling down their shutters! And this is happening when the largest growth of demand for fertilisers globally is coming from India. The result is that our imports are rising, production is largely stagnant, which is exactly the opposite of Make-in-India campaign. The reason: Fertiliser policy is in a mess. The unpaid subsidy to industry is past R40,000 crore, and will have inched towards R48,000 crore by the end of this fiscal year, as per estimates of the fertiliser industry. The budgetary allocation of about R73,000 crore for fertiliser subsidy is no where near the reality on the ground, when arrears are mounting year after year.
The finance minister may be smart enough to show that the fiscal deficit is under control, but these unpaid bills of fertiliser and food subsidy together have already crossed R100,000 crore. Keeping them out of the budget is not good practice. If the government wants to subsidise food and fertilisers, it should be done in a transparent manner, explicitly budgeting those provisions in the annual budgets of the central government. Else, the credibility of the government itself is at stake in terms of budgetary transparency.
Let us concentrate on urea specifically (within the fertiliser sector) as much of the subsidy for the sector is due to exceptionally low urea prices. Our prices of urea are perhaps the lowest in the world—around $85/mt against $265/mt in China and more than $360/mt in Pakistan. Globally, prices hover around $300/mt. Such low urea prices in India have several undesirable effects. First, it leads to higher subsidy burden, and when the government can not pay that to the industry and postpones those payments year after year, the industry gets deeply demoralised.
No wonder, then, no one feels like investing in this sector. This raises doubts about the possible success of Make-in-India dream, especially when such a critical domestic industry is in doldrums. Second, dependence on imports is rising, contrary to the slogan of Make-in-India. More than one-third of India’s consumption of nitrogenous fertilisers (N) is imported today, compared to less than 10% or so in 2000-01. Third, because of highly distorted prices of N, P (phosphates) and K (potash fertilisers), the use of these nutrients is highly imbalanced, which has damaged the soil fertility and is breeding high inefficiency in the use of these resources. Fourth, due to highly subsidised prices of urea, it is being diverted to neighbouring countries and non-agri uses within the country. Neem-coating can partially help arrest its use for non-agri purposes, but not its smuggling to other countries. This is not a good situation to be in.
What are the policy options? First and foremost, clear the arrears to bring some optimism to the industry and resurrect government’s budgetary credibility. If not in one go, the finance minister can announce doing it over two years and stick to the plan. Blaming the previous government for this mess will not help much. It is now the liability of the present government and it needs to find an amicable solution, and do it fast.
Second, bring urea under the nutrient-based subsidy (NBS) scheme and recalibrate the relative prices of N, P and K, with urea prices going up and P and K prices inching down. This will help regain balanced use of N, P and K, while the overall subsidy may remain same.
Third, propagate modern techniques like fertigation and bringing soluble fertilisers under the NBS scheme as well. Soluble fertilisers, through fertigation, can save overall consumption of fertilisers, while boosting agricultural productivity with much better soil health. So, it will contribute to good economics, higher productivity, and better environmental sustainability.
Fourth, a bold policy step will be to take up fertiliser subsidy for direct cash transfer to farmers on a per hectare basis, coupled with decanalisation of imports and decontrolling of fertiliser prices. The issue of owner/tenant can easily be tackled if the government is serious and focused. The accomplishment of opening accounts under Jan Dhan will not have much meaning if food and fertiliser subsidies do not become a part of Direct Benefits Transfer (DBT).
In this context, it may be noted that China has also moved towards DBT as far as input subsidies on fertilisers are concerned.
Lastly, but not the least, should one really work for producing urea at home? The reason is that the main feedstock for urea, namely gas, is available to the Indian fertiliser industry at a pooled price of $10.5/mmBtu, while it is available in many Gulf countries at less than $3/mmBtu. Iran, for instance, is giving gas at $2.9/mmBtu. Will it not be wise to set up plants in the Gulf countries and have long-term contracts for imports? By producing in Oman (OMIFCO) factory, urea can be imported at almost $135/MT. So, will it not be wise to Make-for-India anywhere globally competitive rather than Make-in-India at high costs?
Will the finance minister bite this bullet in the coming budget and put the sector on an efficient and sustainable track? It may be recognised that the problem is becoming elephantine in nature, and tickling its tail will not serve the purpose. One needs to take it head on, else neglecting the fertiliser sector for too long will cost food security heavily. It is hoped the government wakes up in time!
The author is Infosys chair professor for agriculture, ICRIER