Fertiliser subsidies need deeper reforms, better targeting

Fertiliser, one nation one fertilizer policy
India must cut fertiliser subsidies by targeting them better, while also making efforts to reduce the use of chemical fertilisers to facilitate climate change mitigation.

The Union cabinet on Wednesday approved an additional Rs 51,875 crore towards subsidy for phosphatic and potassic fertilisers. The allocation is more than double the budgeted Rs 21,000 crore for nutrient-based subsidy. With this, the fertilizer subsidy bill for the rabi season will mount to Rs 1,38,875 crore including Rs 80,000 crore for urea. The government had allocated Rs 2.15 lakh crore to cover the rise in the prices of natural gas, the key input for urea production.

Fertiliser subsidy is a sensitive issue in India. It played a major role in increasing agriculture productivity in the country. The government initiated several policies to reduce the fiscal burden due to fertilizer subsidies. The Union ministry of chemicals and fertilisers notified the implementation of the One Nation One Fertiliser scheme in August. Under this scheme, all manufacturers which receive government subsidies will have to use a single brand, Bharat, for their fertilisers.

READ | Flawed practices behind India’s low democracy index rankings

The government says the move will help farmers by removing confusion over multiple brands available in the market. The government expects the scheme to reduce the freight subsidy bill and improve availability of fertilizers. The policy has drawn flak for being self-promoting and for not adding any value to the existing system. There are more pressing issues that demand the government’s attention.

One nation, one fertiliser policy

Under the scheme, all subsidised soil nutrients such as urea, di-ammonium phosphate, and Muriate of Potash will be marketed under Bharat brand across the nation. These fertilisers will also come in common bags. While fertilisers of a particular category must meet the nutrient-content specifications of the Fertiliser Control Order, there will be no product differentiation among different brands.

The government argues that farmers are unaware of the nutritional requirements of the soil and often end up buying certain brands that employ vigorous marketing strategies. This has resulted in fertilizer-supply delays. Since the government provides subsidies on fertilisers, an extra burden is put on the exchequer due to increased freight subsidies needing to be paid for the long-distance criss-cross movement of fertilisers. With the scheme, the government looks to save up on transport subsidy cost too.

Resolving fertiliser subsidy issues

The fiscal cost of subsidies amounts to 4.24% of India’s gross domestic product. The government has found itself in a fix as far as fertiliser subsidies go. Not only is it a burden on the exchequer, but also it ends up in the wrong hands instead of benefiting the farmers. The root of the problem lies in the administered pricing policy and the government’s increasing inability to afford the subsidy. Several measures to remedy the flaws have been presented by policymakers time and again. This includes rationalisation of fertiliser subsidies, decanalising urea imports, reducing the dependence on imports by increasing domestic production, incentivising domestic producers, and changing the pattern of fertiliser use.

At present, both the Union and state governments offer a host of price subsidies, including on rice, wheat, pulses, sugar, kerosene, cooking gas, water, electricity, and fertilizers. While price subsidies have formed an important part of the anti-poverty policies in India, they have not significantly transformed the lives of the poor.

Rationalisation hence comes into the picture. With rationalisation, it is hoped that the regressive structure of subsidies can be broken as currently richer households benefit more than the poorer ones. The subsidies also benefit manufacturers mostly, not poor farmers. The previous Economic Surveys have also emphasised on cutting back of price subsidies by using technology as a means to plug leakages. In the debate whether subsidies should continue, policy analysts advocate cutting of leakages in the subsidies and not the subsidies.

Further, another way farmers can benefit is by converting all subsidies into direct benefit transfers. Among the large developing economies, the Indian farmers are paying one of the lowest prices for urea due to subsidies on it. This leads to the misuse of urea as it is largely diverged from non-agricultural uses as well as being smuggled into neighbouring countries. Excessive use of urea causes soil damage. Hence, instead of subsidising fertiliser (especially urea) plants and keeping the price of urea abnormally lower than market dictated prices, the government can look into transferring cash equivalent to the current subsidy amount to farmers.

India needs to make strides in curbing chemical fertilizers to not only check soil quality erosion but also to help mitigate climate change. Organic fertilizers derived from animal products and plant residues can help with this. Currently, the penetration of organic fertilisers is low with a share of just 0.34% in 2019-20.

READ | US interest rate hikes: Fed leaves other central banks with hobson’s choice

India is an agriculture first nation with the majority of the population, nearly 60%, depending on agriculture for a living. It is also one of India’s greatest employers. However, it remains a largely unorganised sector. The agricultural industry has witnessed strong growth in terms of exports during the past 12 months. With its promising nature, agri industries received about $1 billion funding between 2017 and 2020.

India has also been successful in the diversification of agricultural livelihoods by agri-allied sectors, including animal husbandry, forestry and fisheries. This has increased the range of available livelihood opportunities.

Subscribe to Policy Circle newsletter

%d bloggers like this: