Farmers and fertiliser spend: How to make nutrient-based subsidy a success

The NSSO 70th round survey estimates there are 156 million rural households in India, of which 57.8% are agricultural.

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Adding the fertiliser subsidy bill, this amounts to around 1.7% of India’s consumption expenditure. This will have a direct bearing on around 10% of GDP (value added by crops).

The NSSO 70th round survey estimates there are 156 million rural households in India, of which 57.8% are agricultural. Average monthly expenditure on crop production by cultivating agricultural households during July 2012-June 2013 was Rs 2,192. Of this, 24% is spent on fertiliser and manure. Using survey results, rough calculations suggest agricultural households’ spend on fertiliser/manure would be in the range of Rs 78,000-1,20,000 crore in next cropping year 2018-19. Adding the fertiliser subsidy bill, this amounts to around 1.7% of India’s consumption expenditure. This will have a direct bearing on around 10% of GDP (value added by crops).

There is a huge scope for improving efficiency of this spend. In the wake of oil crisis and rise in global fertiliser prices, the government introduced a subsidy on fertilisers in 1970s under the “retention price” framework. High-yielding varieties of seeds coupled with subsidised fertilisers boosted agricultural output. This increased fertiliser consumption as well as domestic production. Even when oil prices subsided, the fertiliser subsidy was in place. With the mounting subsidy bill, the government partially decontrolled prices of P and K fertilisers. Price of urea was still controlled, which was increased at a marginal pace. Higher prices of P and K promoted increased usage of urea.

Estimates put current domestic consumption of fertilisers at 57 million tonnes annually. Of this, 50% is attributed to urea, and diammonium phosphate (DAP) and muriate of potash (MOP) account for 20%. This is primarily due to the skewed nature of fertiliser subsidy in India. Retail prices of MOP and DAP are around two and four times that of urea, respectively. The government subsidises 70-75% cost of urea. Prices of P and K fertilisers are partially decontrolled under the nutrient-based subsidy scheme. This has distorted the soil nutrient ratio from an ideal 4:2:1 for NPK to 6.3:2.6:1.

Research suggests incremental gains in output beyond 4.2 units of N (nitrogen) is zero or somewhat negative. This excessive and wasteful use of urea costs farmers and the government Rs 8,540 crore. Hence, there is a strong case to rationalise the fertiliser subsidy and optimise the spend on fertilisers both by the government as well as by the farmer. The government is trying to reduce the consumption of urea in the country in order to reduce its subsidy bill. With 100% neem coating of urea, the government has now asked fertiliser manufacturers to provide 45kg bags in place of 50kg. Most farmers use fertilisers by an estimate in terms of bags and not the actual volume. Providing urea in 45kg bags will straight away bring down the consumption of urea by almost 10%. This will roughly result in savings of Rs 1,608 crore at the retail spends by the farmer (assuming the 45kg bags are priced proportionately to current prices). Consequently, this additional purchasing power can be spent on other nutrients. Additionally, neem coating has acted as a check on urea from being diverted to non-agricultural uses and across the border.

Bringing urea under the nutrient-based subsidy scheme would address the issue of distorted soil nutrient ratio. Urea and other fertilisers should be subsided at par. The price of urea should be increased in a phased manner so as to achieve optimal use of fertiliser mix. While increasing the price of urea is not without its populist and political hurdles, the current government has shown its resolve in implementing big reforms and the case of urea too should be pursued.

While pricing is just one lever that can be played with to improve the spend, farmer education and extension services will go a long way in improving farming practices. The move to reduce urea bags to 45kg from 50kg is a clear indication of the lack of the same. Despite neem coating of urea and claimed farmer awareness about the benefits and need for reduced use, farmers still use the same amount of urea as earlier. New techniques and technologies may look good on paper, but just like any other policy, the key lies in successful implementation.

Farmer education/awareness can play a big role in making nutrient-based subsidy a success. Farmers should be educated about soil health and the adverse impacts of using excessive urea. Once they are onboard and trust soil health cards, nutrient-based subsidy should be linked to soil health card of the farmland. The subsidy should be provided in such a way so as to incentivise the farmer to use fertilisers that improve soil health. The pilot project in Andhra where the government tried to link supply of fertilisers with soil health cards was a failure primarily on account of lack of trust by farmers. They were not convinced whether the recommended amount of fertilisers would actually help them improve the crop output.

DBT is suggested as a possible route to check leakages in fertiliser subsidy. Apart from the physical infrastructure needed to implement it, the challenge is in terms of purchasing power of the farmer. According to NSSO survey, 69% of agricultural households in rural India are estimated to possess less than 1 hectare of land. Many small and marginal farmers would find it difficult to pay upfront for the full cost of fertilisers and then wait till the subsidy amount is credited to their account. If the burden of collecting the subsidy is left with the retailer/fertiliser company (as is the case), it will lead to an increase in their working capital cost. In case DBT is to be made successful, the government will need to ease and quicken the process of release of the subsidy amount. It will have to be made real-time.

The reform of agricultural subsidies is a long due task. While it is difficult, it is necessary for sustainable agriculture and ensure India’s food security and farmer welfare.

Author is a corporate economist. Views are personal

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