Prime Minister Narendra Modi is perceived to be a crusader when it comes to plugging leakages from the subsidy distribution pipeline.
Prime Minister Narendra Modi is perceived to be a crusader when it comes to plugging leakages from the subsidy distribution pipeline. He has amply demonstrated this in the case of LPG (liquefied petroleum gas), wherein the government implemented direct benefit transfer (DBT) and saved about R15,000 crore annually. However, when it comes to fertilisers, similar initiatives are conspicuous by their absence.
During 2015-16, out of an allocation of R73,000 crore on fertiliser subsidy, as much as R50,300 crore was on urea. The subsidy is administered through manufacturers who are directed to sell urea at a fixed uniform maximum retail price (MRP) and get reimbursement for excess of their unit-specific production cost over MRP under the new pricing scheme (NPS). Imported urea, too, is subsidised, being excess of landed cost plus handling and distribution over MRP.
According to the Economic Survey 2015-16, as much as 24% of the subsidy is spent on inefficient producers, 41% is diverted to non-agricultural uses including smuggling to neighbouring countries, and 24% is consumed by larger, presumably richer farmers. That leaves a tiny 11% going to small and marginal farmers who alone, according to the philosophy adumbrated by Prime Minister Modi ad infinitum, should be the sole beneficiaries of subsidy.
The Survey strongly advocated for DBT of fertiliser subsidy to the bank accounts of beneficiaries using the JAM (Jan Dhan-Aadhaar-Mobile) platform, the genesis of which is to better target subsidies, and was already laid down in the 2014-15 Survey. So, what has finance minister Arun Jaitley offered in the Budget for 2016-17? In his speech, he had said, “We have already introduced a direct benefit transfer in LPG. Based on this successful experience, we propose to introduce DBT on a pilot basis for fertiliser in a few districts in the country, with a view to improving the quality of service delivery to the farmers.”
In the Budget for 2012-13, the government had announced tracking the movement of fertilisers from retailers to farmers, and linking part of subsidy payment to manufacturers for the sale of fertilisers to farmers by retailers. In the mid-year economic analysis of 2012-13, the finance ministry came out with a blueprint on modalities for implementing the Budget announcement. Pilot projects in 10 districts spread over nine states were to be launched.
After successful implementation in these 10 districts, cash subsidy was to be transferred to farmers (read DBT) in the next phase from April 1, 2013. Concurrently, tracking the movement of fertilisers was to be rolled out in the whole country. The Department of Fertilisers (DoF) developed a mobile and a web application—a mobile Fertiliser Monitoring System (m-FMS) that provides information on stock, sale and receipt of fertilisers till the last retail point.
According to this roadmap, DBT should have been implemented all over India from April, 2014. Now, juxtapose this with Jaitley’s announcement (two years thereafter) that “the government proposes to introduce DBT and that too on a pilot basis in a few districts.”
This is even worse than what had happened under the erstwhile UPA dispensation. The ship has become rudderless.
While the Survey stresses upon the need for identification of beneficiaries, opening of bank accounts, imparting knowledge in handling of accounts, and infrastructure network to service all villages and towns in every nook and corner of the country, no attention is paid to other crucial links in the transition towards DBT.
With the launch of DBT, the NPS for urea and, likewise, the nutrient-based scheme (NBS) under which manufacturers of P&K fertilisers are paid subsidy will have to go. This will require manufacturers and other stakeholders such as distributors and retailers to be put on advance notice to enable them adjust to the new dispensation of having to sell fertilisers at market-based prices.
The infrastructure for supply of gas to all plants needs to be put in place to ensure a level-playing field. If a gas pipeline does not reach any plant, forcing it to use higher cost feedstock, say, naphtha, it won’t survive under the DBT regime. The Jagdishpur-Phulpur-Haldia gas pipeline project, which is intended to meet gas requirements of a number of plants in eastern Uttar Pradesh, Bihar, Jharkhand and West Bengal, must be commissioned ahead of the D-day.
A number of high-cost units are under public sector undertakings (PSUs) such as the Fertiliser Corporation of India, Brahmaputra Valley Fertiliser Corporation and Madras Fertilisers. Some are lying closed for many years, while others are making losses. Under market-based pricing, when unit-specific support (currently given under NPS) will no longer be available, the losses of loss-making units will increase and the chances of reviving closed units will become dim. Therefore, the government will have to think through a ‘special package’ for them to remain viable.
At present, 50% of urea production and 20% of P&K fertilisers are subject to movement and distribution controls. The freight cost is separately reimbursed as subsidy to the manufacturers. Under DBT dispensation, these controls and freight subsidy will have to go, even as the cost of moving fertilisers to consumption points has to be reflected in the selling price.
Currently, outstanding subsidy dues to manufacturers running into thousands of crores of rupees are a routine affair. They manage by extra borrowings from banks or issuing of bonds by the government against subsidy receivables. To let this happen under DBT would be disastrous. The government will have to make adequate provisions and ensure that no dues are pending to farmers.
Ironically, none of these aspects has received the attention of policy-makers. Far from that, under a new comprehensive urea policy announced in May last year, the government has decided to continue extant unit-wise NPS and keep urea MRP frozen for a period of four years.
It appears that either the government is not serious about DBT, or it is the proverbial case of the “left hand not knowing what the right hand does.”
It is high time the Prime Minister holds a high-level meeting to take a ‘holistic’ view and quickly get into the action mode. Any dilly-dallying here will mean that the colossal wastage of fertiliser subsidy will continue unabated, more than offsetting the laurels brought by the success of DBT in LPG.
The author is a policy analyst