Why half-baked fertilizer reforms won’t deliver

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Updated: January 29, 2020 7:49:06 AM

If the government wants to restrict subsidised supply only to small and marginal farmers having landholding size <2 hectares, this will require two streams of supplies in the distribution channels viz.

The Union government controls the maximum retail price (MRP) of urea at a low level, unrelated to the cost of production and distribution, which is much higher.

Reportedly, the government is likely to fix nutrient-based subsidy (NBS) rate for urea before rolling out the direct cash transfer (DCT) of urea subsidy to farmers’ accounts. The subsidy, expressed as rupees per hectare, will be based on soil health, and size of landholding.

The idea of NBS for urea is not new. It was recommended, in 2012, by a committee under the chairmanship of then agriculture minister Sharad Pawar in the follow-up to a similar scheme for non-urea, or phosphate (P) and potash (K) fertilisers introduced in April 2010. After dilly-dallying for close to a decade, it has been resurrected.

The Union government controls the maximum retail price (MRP) of urea at a low level, unrelated to the cost of production and distribution, which is much higher. The manufacturers get reimbursement for the shortfall in realisation from sale as subsidy on a ‘unit-specific’ basis under the new pricing scheme (NPS). Further, they get reimbursement for cost of movement (this includes primary movement by rails from the plant, and secondary movement from the unloading rake point, by road, to the retailer) under a uniform freight policy. Invariably, the MRP is kept unchanged (today’s price is the same as in 2002) even as all cost escalations are absorbed by increase in subsidy.

In case of P&K fertilisers, the government fixes ‘uniform’ subsidy on per nutrient basis for all manufacturers under NBS. The manufacturers are free to fix MRP, but are expected to reflect the subsidy in it. They are reimbursed for freight cost only towards primary movement on the basis of actual rail freight (as per railway receipts). Even as the government keeps the subsidy unchanged, increase in cost leads to an ever increasing MRP. The exclusion of secondary movement cost from the purview of freight reimbursement puts further pressure on MRP.

Juxtapose these varying policy dispensations for the two fertiliser types, and it follows that the MRP of urea has been consistently lower than that of non-urea fertilisers, prompting farmers to use more of the former and less of the latter.

This is at the root of increasing imbalance in NPK use ratio, declining crop yield, and deterioration in soil health. The introduction of NBS for urea is aimed at addressing this imbalance by aligning the policy dispensations for the two.

However, introduction of NBS per se won’t achieve the desired result unless it is accompanied by other reform measures. First, the government will need to drastically reduce subsidy on urea and, simultaneously, increase subsidy on P&K so that the MRP of the former is lifted, and that of the latter lowered from current levels. This way alone can excess use of urea be curtailed, and that of non-urea fertilisers increased to reduce imbalance.

Second, P&K fertilisers should also be brought under a ‘uniform freight policy’ to provide for reimbursement of both primary, and secondary transportation cost—as applicable to urea. Alternatively, the subsisting scheme of freight reimbursement for both fertiliser types should be dismantled.

Third, considering that under NBS, all urea manufacturers will get the same subsidy (unlike under the present dispensation, where it is unit-specific), the government should ensure that they are not affected differentially by ‘external’ factors. In 2015, the government had introduced a system of pooling domestic and imported gas to ensure supply at a uniform price to all units. However, the delivered price at the factory tap varies.

This is because at present, gas is zero rated under Goods and Services Tax (GST), implying that it continues to be covered by erstwhile dispensation of excise duty (ED), and value added tax (VAT). While ED on gas is nil, VAT varies from state to state, with a low of 5% in Rajasthan, and high 21% in Uttar Pradesh (UP). Under NBS, a unit located in UP will be unduly penalised whereas one in Rajasthan will make fortuitous gain. Hence, the current zero rate tag on gas needs to go, and GST levied at an appropriate level (say 5%, which is also the GST applicable on all fertilisers).

This will ensure that all urea units are uniformly affected. The NBS for urea, along with the above three reform measures, is undoubtedly an improvement over the present messy system. However, this will be a half-baked reform as subsidy continues to be routed through manufacturers. With low price (albeit subsidised) fertilisers available at dealers’ shops, there will always be an incentive to divert to chemical industries, or smuggle to neighbouring countries. Besides, what the farmer buys will continue to be dictated by the quantum of subsidy the government gives on urea vis-à-vis other fertilisers.

Furthermore, this system is not amenable to targeting of subsidy. If the government wants to restrict subsidised supply only to small and marginal farmers having landholding size <2 hectares, this will require two streams of supplies in the distribution channels viz. subsidised, and the other unsubsidised/full cost based, the latter to cater to the requirement of farmers with landholding size >2 hectares. Any attempt to push for a dual-pricing regime will lead to utter chaos.

The only way to avoid diversion, target subsidy, and empower farmers (giving the freedom to use subsidy for buying fertiliser of his/her choice based on soil-crop needs) is to transfer subsidy directly to the account of farmers, even as they pay the full market price to the dealer or manufacturer. The government may decide on a fixed amount per hectare based on likely nutrient (N, P, K, etc) requirements for different agro-climatic zones. Further, the eligibility may be capped at the requirement corresponding to two hectares.

With this, and no need to route subsidy through manufacturers, NPS, NBS, and schemes for reimbursement of movement cost and associated controls will go. The resulting scenario will unleash the full potential of manufacturers by way of increased efficiency and reduced costs, boost to domestic production, innovative solutions for meeting farmers’ diversified needs, and even savings in subsidy.

Instead of half-baked moves (NBS), Modi should go for holistic reforms.

The author is Policy analyst, www.uttamgupta.com

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