What is holding back direct fertiliser subsidy transfer?

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Published: November 24, 2014 12:05 AM

Direct transfer of subsidy to farmers holds the key to countering all ills afflicting the fertiliser sector...

Direct transfer of subsidy to farmers holds the key to countering all ills afflicting the fertiliser sector in India. Successive governments have talked about it and yet none has ventured to implement this. What has held them back?

The idea was first mooted nearly four decades ago when, in March 1976, faced with increasing prices of complex phosphate fertilisers—then, there were no controls and manufacturers were free to fix price—the government introduced a flat subsidy at the rate of R1,250 per tonne phosphate nutrient (P2O5).

The initial plan was to give the money directly to farmers so that the effective price (net of subsidy) paid by them for these fertilisers was correspondingly reduced, say, by R575 per tonne in case of DAP, a popular complex fertiliser (it has 46% P2O5).

But it was abandoned as policy-makers thought it was physically impossible to distribute the money to millions of farmers in every nook and corner of the country. They were also apprehensive about farmers using money for the intended purpose.

Instead, the government decided to give subsidy to manufacturers with a direction that they would reduce price to farmers by that much amount. There being few manufacturers, it was easier to administer and monitor use of subsidy through this route.

Meanwhile, from November 1, 1977, the government introduced the retention price scheme (RPS) for urea under which manufacturers were given subsidy equal to excess of their reasonable cost of production and distribution over controlled maximum retail price (MRP).

From February 1979, complex fertilisers too were brought under RPS. The scheme was administered by a body called the Fertiliser Industry Coordination Committee (FICC), under the Department of Fertilisers (DoF). With a small budget, it was disbursing subsidy running into hundreds/thousands of crore of rupees.

The second time the government thought through this idea was in 1991-92 when, under pressure from the IMF, it was forced to increase MRP of all fertilisers by 40%. Due to a hue and cry raised by political parties across spectrum, the hike was truncated to 30% for small and marginal farmers.

However, the government decided to give the amount corresponding to 10% differential in price directly to farmers. The Centre gave funds to state governments with an advice to make arrangements for transfer to beneficiary farmers in their domain.

How did this pan out? In a statement made in Parliament, the government informed that only 3.5% of farmers benefited from the move. The experiment was a fiasco. From the following year 1992-93, the direct subsidy scheme was quietly withdrawn.

Due to continuing IMF/World Bank pressure, from August 25, 1992, the government was forced to decontrol all complex phosphate fertilisers and abolish subsidy. This led to steep increase in their price, triggering a political backlash. In just five weeks, it resurrected subsidy as ad hoc concession from October 1, 1992.

With this, the third time the central government mooted the idea of direct transfer to farmers to be routed through states. But the latter did not even give it a try; instead, they passed on the money to the manufacturers with a direction to lower MRP equal to concession amount.

This led to utter chaos as states delayed payments to manufacturers, paid less than what was legitimately due to them, and even forced them to sell at artificially low prices. Some states such as Bihar did not pay at all and diverted funds to other uses.

Frustrated with the mess created by states each time they were roped in, from 1997-98 the central government reverted to making direct payment to manufacturers. The dispensation continues till date.

Meanwhile, in the 2012-13 Budget, the then UPA government announced tracking the movement of fertilisers from retailers to farmers and linking part of subsidy payment to manufacturers to 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 its implementation.

As per this blueprint, pilot projects in 10 districts spread over nine states were to be launched. After successful implementation in these districts, cash subsidy was be transferred to farmers in the next phase from April 1, 2013. Concurrently, tracking the movement of fertilisers was to be rolled out in the whole country.

The DoF had even developed a mobile Fertiliser Monitoring System (m-FMS) that provides information about stock position, sale and receipt of fertiliser till the last retail point. Yet direct subsidy transfer to farmers is eluded!

Earlier, the government was hamstrung due to lack of technology and infrastructure. Today, with m-FMS in place and the roaring success of the Pradhan Mantri Jan Dhan Yojana (PMJDY)—over 65 million accounts have already been opened—these constraints no longer exist. A public financial management system (PFMS) is also being installed to track fund flow and ensure that there is no pilferage and money reaches the beneficiary’s account.

What, then, is the government waiting for? Why is it not coming clean? Why does it not say that the scheme will be implemented by so and so date? The prime reason for dithering lies elsewhere.

Under the current scheme of things, the urea manufacturers get compensated for any excess of their production and distribution cost over controlled MRP as subsidy. Under the new pricing scheme (NPS)—a new incarnation of erstwhile RPS—each unit gets a different subsidy depending on its cost, which varies widely.

While the current MRP is R5,360 per tonne, the production cost can vary from a low of about R11,500 per tonne for an efficient gas-based plant to over R40,000 per tonne for plants on alternate feed stock such as naphtha, fuel oil, etc. Some plants in the latter category also happen to be under PSUs.

In a scenario of direct subsidy transfer to farmers and support under NPS missing, the manufacturers will have to compete in the marketplace on the basis of their production cost and it is likely that high cost units including those with PSUs will lose in the race. Although in public posturing the political establishment may still cite implementation issues, the government’s real worry stems from the inevitable fallout of disbanding the protective umbrella for high cost, especially PSU, units.
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The author is a Delhi-based policy analyst

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