A phased rise in urea prices and direct subsidy disbursal to farmers
will address the concerns of a variety of stakeholders. The application
of fertilisers was popularised during the Green Revolution...
The application of fertilisers was popularised during the Green
Revolution of the 1960s and the 1970s to help boost crop yields. The
simultaneous application of fertilisers led to an increase in the
country’s average wheat productivity from 851 kg/hectare in 1960-61 to
1,307 kg/hectare in 1970-71. Increment in the usage of fertilisers over a
period of time proved to be of tremendous contribution to the success
of Green Revolution; it helped improve agricultural productivity and
transformed India into a nation that could feed itself.
An increase in the costs of mineral-based fertilisers after the 1973 oil
crisis forced the Government to plan out strategies to encourage the
use of these fertilisers, sighting their importance in improving the
nutrient value of the soil. Thus, the Government provided reimbursements
to companies to compensate for high cost of production for the
mineral-based fertilisers and for selling it at low costs to the
farmers.
However, even after the tremendous contribution, today, the fertiliser
industry finds itself in a rather unfortunate and untenable situation;
the current trends depict that the marginal productivity of soil is
declining despite application of fertilisers. Moreover, the industry has
not been able to free itself from the clutches of regulation, even
though the Government has, over the years, professed free market
economics and liberalisation.
INDUSTRY ISSUES
Imbalanced fertilisation: In April 2010, the Government
introduced the nutrient-based subsidy (NBS) regime to release the
industry from stifling controls, but implemented the scheme selectively
only on non-urea fertilisers. Under this policy, the market price is
determined based on supply and demand factors and the Government pays a
fixed subsidy. This has made P&K (phosphatic and potassic)
fertilisers commercially viable, resulting in increased production and
availability.
On the other hand, urea, accounting for almost 50 per cent of fertiliser
application was left out of the NBS regime. As a result, production
costs for P&K fertilisers have soared in the last three years due to
high global input prices.
The cumulative effect of this has been a depletion in the NPK use ratio
(normally accepted ratio being 4:2:1) to 6.7:3.1:1 in 2011-12, resulting
in imbalanced fertilisation.
Fiscal deficit: Fertiliser subsidy is the most debated issue in
the country today, as the government is looking to contain the fiscal
deficit alongside rolling out a Food Security Bill. Fertilisers, after
oil and food, account for the third-biggest share of India’s total
subsidy bill, which is estimated at Rs 2,20,971.50 crore for the current
fiscal. On the other hand, Fertiliser Ministry is facing a major cash
crunch and has not been able to pay reimbursement amount to the
companies. Recently, the Ministry arranged for Rs 5,000 crore bank loans
for fertiliser companies. Subsidy bill payments have been delayed by
over seven-eight months for P&K fertilisers since last July and for
urea since last August.
Stagnant investments: A highly regulated and controlled regime
over a long period has made the fertiliser industry practically
unviable. The current mechanism does not incentivise efficiency and new
investments. In fact, since 1999, no new plant has been commissioned to
manufacture urea.
In some cases, this regime resulted in the shutdown of some plants
leading to a reduction in capacity. Due to negligible capacity
additions, dependence on imports has increased significantly. The
fertiliser industry plays an important role in ensuring food security of
the country. To ensure food security, there is need for
self-sufficiency in domestic production of fertilisers, particularly,
urea.
Other issues: The Government is worried about the mis-utilisation
of subsidised urea. In its view, subsidised urea is getting diverted
for non-agricultural use. Since retail price of urea in India ($98 per
tonne) is way below that in neighbouring countries such as China ($348),
Pakistan ($344) and Bangladesh ($250), it is also worried about the
cross-border illegal trade of urea. Such diversions are inevitable when
prices of any controlled commodity are lower than the actual market
price.
PROSPECTIVE SOLUTIONS
Here are the few possible solutions to the above issues:
Direct subsidy transfer to farmers: The Government can shift to a
system of direct transfer of fertiliser subsidy to farmers in a phased
manner, starting with monitoring movement of fertilisers up to the
retail points. This will help farmers buy high-priced complex
fertilisers at reasonable prices, but the issue of fiscal deficit
continues to impact the sector. Also, in a vast country such as India,
implementation of any policy at the grassroots level always has certain
limitations.
Phased increment in urea prices: A phased increase in urea prices
and compensation for a raise in fixed costs should follow promptly to
de-control farm gate price eventually. Henceforth, frequent revision of
urea tariffs should be proposed by the Government to close the wide gap
between urea and P&K fertilisers to enable efficient usage and
better agricultural productivity. But, urea subsidy being a
politically-motivated issue faces a lot of hurdles in the process.
The balanced solution
NBS is a step in the right direction. It will not only help in achieving
a balanced nutrient consumption but also improve the Government’s
finances. The policy is also expected to bring in more transparency and
investments into the sector, which relies on imports heavily and suffers
from lack of production capacity. There had been no fresh investments
in the sector for more than a decade due to uncertainty in the pricing
structure.
The present subsidy regime is skewed heavily in favour of urea, leading
to its imprudent and unabated use. Therefore, there is a need to
increase urea prices and bring parity with P&K fertiliser prices to
maintain NPK balance.
This will help by restoring the nutrient consumption balance towards
ideal NPK ratio of 4:2:1, resulting in increase in crop yields and
improvement in soil health.
Subsidies undoubtedly have played a significant role in promoting
fertilisers, but they have been questioned in recent years due to their
declining contribution, inequity and government’s expanding budget
deficit. The need of the hour is to move towards an environment for
holistic development of the sector with the goal of achieving efficiency
and self-sufficiency.
(The author is Managing Director, Tata Chemicals Ltd.)
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