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Video Analysis

Fertilizer Subsidy Reforms: Scope, Problems & Challenges [RSTV Big Picture]

Launching DBT in the fertilizer sector seems a gigantic task as the beneficiaries and their entitlements are not clearly defined at this present.
By IT's Video Analysis Team
April 05, 2017

Contents

  • Why in news?
  • Fertiliser sector: Basic Facts
  • Background
  • Point-of-sale (POS) machines
  • Significance of the move
  • Challenges
  • Suggestions
  • Conclusion

 

Fertilizer Subsidy Reforms: Scope, Problems & Challenges

Why in news?

  • Encouraged by the success of a pilot project in 17 districts of the country, the Centre has decided to roll out one of its biggest subsidy reforms across the country from June.
  • Under this reform, fertilizer subsidies would be transferred to manufacturers on the basis of actual sales.
  • A move which will pave the way for implementation of the direct benefit transfer (DBT) system in this sector and could save up to Rs 7,000 crore by plugging leakages.

Fertiliser sector: Basic Facts

  • Fertiliser accounts for large fiscal subsidies (about 0.73 lakh crore or 0.5 percent of GDP), the second-highest after food.
  • There are 3 basic types of fertiliser used—urea, Diammonium Phosphate (DAP), and Muriate of Potash (MOP).
  • Of all the fertilisers, urea is the most produced (86 per cent), the most consumed (74 per cent share), and the most imported (52 per cent).
  • Urea also faces the most government intervention. Urea is the most physically controlled fertiliser, with 50 per cent under the Fertiliser Ministry’s movement control order compared with 20 per cent for DAP and MOP.
  • Urea also receives the largest subsidies, in outlay terms (accounting for nearly 70 per cent of total fertilisers subsidy)
  • Government interventions in urea and DAP/MOP differ not just in scale, but also in kind. DAP and MOP producers and importers receive a Nutrient Based Subsidy (NBS) based on a formula that determines the amount of N, P and K in a given amount of fertiliser.
  • Per kg subsidies on DAP and MOP fertiliser are hence fixed—they do not vary with market prices. Imports of DAP and MOP are also not controlled.

Background:

  • At present, subsidies are paid to fertilizer companies on the basis of receipt of fertilizer at rail rake points or identified godowns in districts.
  • The current subsidy design creates a black market that hurts farmers most and does not encourage producers to operate efficiently.
  • There is no foolproof mechanism to ensure that there is no diversion of the subsidised material from these points for sale in the open market (or to neighbouring countries) or for non-agricultural use.

Point-of-sale (POS) machines:

  • The Modi government has targeted the installation of point-of-sale (POS) machines in all the two lakh-odd fertiliser retail outlets in the country. There are about 2 lakh retail fertilizer outlets across the country.
  • These devices, connected to a central server, would capture every sale transaction along with details about the buyer.
  • The biggest benefit from the system is that information will now be available on who is buying and how much. If somebody is buying a truckload of urea — 200 bags or more — that person clearly isn’t a farmer.
  • The data generated by the system will be able to identify such impersonators. Even if they are actual farmers, they can be identified for exclusion from the subsidy scheme.

Significance of the move:

  • It will control the leakage of the subsidy and save huge amount of money to the exchequer.
  • New system will completely stop illegal diversion of fertilizer for non-agriculture applications like in plywood and textile sectors or for milk adulteration. Sales of neem-coated Urea have already put this practice to an end.
  • It is also aimed to make the transactions digital between the farmer and the fertilizer company.
  • Unlike other susbidies such as for cooking gas and kerosene or foodgrain where subsidy is capped for certain quantity per household or individual, the government will adopt the “no denial” policy in the case of fertiliser sale. This means anyone who presents his Aadhaar number will get the fertilizer at subsidized rate.

Challenges:

  • From the coming kharif season, starting June, subsidy will be paid to the companies only after the purchase of fertiliser by the farmer. In other words, the subsidy is still getting credited to the company and not the farmer. In that sense, it isn’t direct benefit transfer (DBT).
  • Fertiliser Subsidy has become a game of only three chemicals- NPK (nitrogen, phosphorus and potassium). It is against the idea of promoting organic farming in the country.
  • There are huge discrepancies in the usage of fertilizer. In states like Punjab, the ratio of NPK usage is 61:19:1 against ideal 4:2:1
  • Urea is cheap to purchase so farmers use it more that creates imbalance due to which the yield either goes down or is stagnant.
  • Correlation between the use of chemical fertilizer and agricultural yield is also not clear. In 1950, with the use of less NPK, the yield was more. Now, with the use of more NPK, lesser yield is being produced.
  • Government is selling compost at a particular price and same is the rate for urea so this would not push the farmers towards organic farming.
  • These subsidies will only help fertilizer companies to sustain their business but in the long run farmer’s business will be hampered because his input costs will continuously increase with inversely proportional output rates.
  • Some argue that the POS machines will not work and capturing retail-level transactions, involving millions of farmers buying in the peak agricultural season.
  • Current method may result in Rs 5000 to Rs 7,000 crore in savings by plugging leakages and diversion but to achieve Rs 25,000 crore saving much more effort is needed on all fronts.
  • Launching DBT in the fertilizer sector seems a gigantic task as the beneficiaries and their entitlements are not clearly defined at this present.
  • “Different inputs – urea, phosphatic and potassic fertilizers – have different rates of subsidies.
  • Besides, it would be premature to accept that all the farmers would be able to buy their requirements of fertilizers at market rate and wait for 15 days or a month to get the subsidies.
  • It will take about a year to understand and get a trend of how much fertilizer is actually sold across the country and who is buying what. A soil health card scheme launched last year will help in determining the actual need of fertilizer but so far it has achieved only 40% of its target.
  • Fertiliser subsidies are very costly, accounting for about 0.8 per cent of GDP (including arrears).
  • They encourage urea overuse, which damages the soil, undermining rural incomes, agricultural productivity, and thereby economic growth.
  • Fertilizer subsidies are generally criticized because they are perceived to be far from universally distributed and concentrated on relatively few producers, mainly large farmers.

Suggestions:

  • Subsidy should be linked to productivity which will remove fertilizer companies from the game.
  • The momentum for these changes has to be created through robust policies.
  • State Governments and Central Government need to work in tandem to encourage farmers for ecological farming. Particularly in western UP and Punjab, the farmers need to move away from wheat and rice because the ground water has depleted.
  • Farmers have to be educated and taught to change their cropping pattern and move to multiple cropping.
  • There is a need to improve the organic content of the soil through organic farming or compost.
  • To secure long term fertiliser supplies from locations where energy prices are cheap, it might be worth encouraging Indian firms to locate plants in countries such as Iran following the example of the Fertiliser Ministry’s joint venture in Oman, which allowed India to import fertiliser at prices almost 50 per cent cheaper than the world price.
  • Fertiliser is a good sector to pursue JAM because of a key similarity with the successful LPG experience: the centre controls the fertiliser supply chain.

Conclusion:

The subsidy getting credited directly to the bank accounts of the beneficiaries along with free pricing — which leads farmers to buy fertilisers most suitable for the crop and soil, independent of subsidy — is what DBT is ultimately about. Reform of the fertiliser sector would not only help farmers and improve efficiency in the sector. It would also show that India is prepared to address exit constraints that bedevil reform in other sectors.  

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