Huge subsidies are hurting both the soil and farm profits. Use cheaper imports, give subsidies in cash to farmers.
All subsidies are justified as either helping producers or users, but in the case of urea fertilisers, neither seem to be benefiting, as a paper by Icrier’s Ashok Gulati and Pritha Banerjee shows. So, while it is true that around 77% of the cost of urea is subsidised, a large part of this goes to local producers: right now, Indian prices are around $332 per tonne for urea versus global prices of $285 (cif), and the latter were a fourth lower than this a couple of years ago. Just seven Indian plants are cost-effective right now, compared to 17 in FY15. And, with the government not accounting for the hike in industry costs for a long time, industry’s PAT-to-Net-Worth has been negative for the last five years; it has been positive for four years if you include some of the promises made in the last price policy, but at an average of 3.3%, this is far below the 12% the industry was assured. Also, a cash-strapped government still owes the industry around Rs 39,000 crore.
Apart from the fact that a large part of the Rs 50,000 crore urea subsidy goes to local producers, discerning farmers would prefer this be converted into a less distortionary cash-transfer. Right now, since urea (N, to use the chemical term) costs a fraction of what it should, farmers use too much of it; against the ideal N:P:K ratio of 4:2:1, the average is 6.1:2.5:1, and this goes to as high as 25.8:5.8:1 in states like Punjab. This has resulted in a sharp fall in productivity due to the nutrient balance in the soil worsening. While farmers got 13.4 kg of grain for each kg of fertiliser used in 1970, this fell to just 3.7 kg in 2005; it is even lower today. With farmer yields falling, so are profits; if farm incomes are to be doubled by FY23, fixing the nutrient imbalance is critical. If farmers got the same amount of subsidy anyway, they would buy less of urea if its price were raised to market levels; this would, over time, result in higher yields.
Since Indian producers are, on average, more energy efficient than global ones, the price of natural gas is what determines the difference in the costs of urea; till urea plants got more of the cheaper local gas, their costs were more reasonable. In FY13, 76% of the gas used was local; it was 30% in FY20. With gas costs rising from $9.8 per mmBtu in FY16 to $12.3 in FY17, Indian costs have surged.
The industry’s poor financials, in turn, have limited fresh investment. While that is the reason why the government is trying to revive five shut units at a cost of Rs 39,651 crore, it makes little sense since the average cost of these plants will be $450-550 per tonne. Ideally, India should be importing urea, possibly from plants set up in the Gulf, or in Russia, by Indian firms, or enter into long-term contracts with them; in years when global prices shoot up, India can possibly export urea. Moreover, if the government were to encourage more local production of gas and not insist that more of it be sold to power plants—a lower gas price for power plants lowers the power subsidy while increasing the fertiliser one—local production costs of urea could also fall.
A related issue is the high social and environmental cost of the policy. Gulati and Banerjee discuss the impact of excess nitrogen from urea leaching into the soil, and that of the deficiency of, for instance, sulphur, iron, zinc, and manganese caused by use of too little non-urea fertilisers; this, the authors posit, is responsible for stunting and, due to nitrate contamination of water, even blue babies.