Union Budget FY22 misses the chance to reform fertiliser subsidy

By: |
February 10, 2021 5:30 AM

The fertiliser subsidy allocation for FY22 signals there will be no reform this fiscal; deficit targets show this is unlikely in the next five years too

The subsidy can be restricted only to farmers having less than two hectares.The subsidy can be restricted only to farmers having less than two hectares.

Under the “Stimulus – III” unveiled on November 12, 2020, the Union finance minister, Nirmala Sitharaman, made an unprecedented announcement to release an additional Rs 65,000 crore towards fertilisers subsidy over and above Rs 71,000 crore allocated in the Budget for FY21. She has followed it up by providing a total of about Rs 134,000 crore in the revised estimate (RE). This should be enough to pay for all subsidy dues, including carry forward from FY20. For FY22, she has allocated close to Rs 80,000 crore, which should be enough to meet the requirement next year.

This, besides payment of all of the food subsidy dues for FY21 and adequate provision for next year (RE is Rs 422,000 crore, up from Budget allocation of Rs 116,000 crore; allocation for FY22 at Rs 242,000 crore is expected to more or less fully cover the requirement), has been made possible due to substantial relaxation in government’s fiscal deficit (FD) trajectory. The FD for FY21 is 9.5% of GDP against the budget estimate (BE) 3.5%, which itself was 0.5% higher than the 3% threshold as per Fiscal Responsibility and Budget Management (FRBM); this has been justified by Sitharaman, in terms of “far-reaching reforms” and “unanticipated fiscal implications”.

For FY22, the FM has targeted FD at 6.8%, which will be brought down to 4.5% by FY26—instead of 2.5% in FY23 as per the NK Singh Committee on review of the FRBM. For the next five years, thus, the government has kept a fairly good cushion to pay all of the subsidy dues every year—maybe even on an escalating scale.

The fertiliser manufacturers, sickened by delayed payment of subsidy dues running into thousands of crores year-after-year, could not have got anything better. They have not only received all of their past dues but also are assured that, until FY26, they won’t face any delay in receiving payments. However, the Budget brings bad news when it comes to reforms in this crucial sector.

The FM has not announced any reform measure, nor does one get a sense, by looking at the budget allocation for fertiliser subsidy, that such an announcement could follow in the coming months. Normally, any reform measure, say, increase in the MRP of urea, restructuring the mechanism of determining payment to producers, etc, results in a reduction in subsidy payment.

Since the allocation for FY22 is more or less close to the requirement, it is unlikely that any of the above measures could be in the offing. Even thereafter, given that the Modi government is open to keep the purse strings loose, it is clear that fertiliser reforms have been put in the deep freezer for five years.

The government may be keen to spend more and put the economy on a high-growth trajectory, however, it needs to introspect on where the money spent on subsidy is going? Is it properly utilised? Is it generating the required impulses for propelling growth?

The answer is hidden in an analysis by the chief economic advisor (CEA) in the Economic Survey FY16. According to it, 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% for small and marginal farmers who should be getting the maximum benefit. This is happening under the existing system of routing subsidy through producers.

Under this system, the Centre caps the MRP of urea at a low level, without any relation to the cost of production and distribution. Manufacturers get reimbursed for the shortfall in realisation from sales via the subsidy on a ‘unit-specific’ basis under the new pricing scheme (NPS). The MRP is kept unchanged (today’s price is the same as in 2002) even as all cost escalations are absorbed by raising the subsidy. For P and K fertilisers, there is ‘uniform’ subsidy on per nutrient basis for all manufacturers under the Nutrient Based Subsidy (NBS) Scheme.

They are free to fix MRP but are expected to reflect the subsidy. Even as the subsidy remains unchanged, rising costs mean ever-increasing MRPs.

Juxtapose these varying policy dispensations for the two fertiliser types, and it is clear 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. The resultant imbalance in fertiliser use is affecting crop yield, leading to deterioration in soil health and is adversely impacting the environment.

That apart, the ‘unit-specific’ system of reimbursing cost to manufacturers under NPS accommodates all and sundry including those producing at Rs  20,000/tonne … 25,000/tonne and so on. The revival projects, viz Sindri, Gorakhpur, Barauni, etc, are all public sector undertakings (PSUs) and are expected to be commissioned in 2021 and 2022; these will have a cost of over Rs 30,000 per tonne. The subsidy regime will take care of them as well.

Moreover, because of urea being available at a throwaway price of Rs 5,360 per tonne as against the cost of supply or market price being 3-4 times higher, dubious operators make a quick buck by diverting it to chemical industries or smuggling to neighbouring countries. This won’t be possible without the tacit consent of those in the hot seat. Given the amount of money involved, they have every incentive to even flout the much-trumpeted mandatory neem-coating.

Under the existing system, a subsidy is built into the price. The farmer pays Rs 268 for a 50-kg bag of urea against the much higher cost. This is due to subsidy. Further, there being no limit on the quantity purchased, a farmer who buys more, corners a higher proportion of the subsidy. A large farmer, having a landholding of 10 hectares, will corner 10-times more subsidy than a marginal farmer having less than one hectare (a ceiling on the number of bags a farmer can buy at the subsidised price—reportedly under consideration—is impractical).

In this backdrop, if the government continues to pour more and more money into the existing system, it is tantamount to unjust enrichment of a few. It will neither spur growth nor help poor farmers. We can get both growth and more money in the hands of poor farmers if only Modi dismantles this system; instead give subsidy (read target) only to small and marginal farmers.

The Commission for Agricultural Costs and Prices (CACP), in its rabi report for 2021-22 marketing year, has recommended giving Rs 5,000 per year to every farmer. The subsidy can be restricted only to farmers having less than two hectares.

Author is a policy analyst; Views are personal

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