Alluding to direct benefit transfer [DBT] of fertilizer subsidy, in budget speech for 2016-17, finance minister, Arun Jaitely had stated :-
“We have already introduced DBT in LPG. Based on this successful experience, we propose to introduce DBT on pilot basis for fertilizer in few districts in the country with a view to improving quality of service delivery to the farmers.”
As a follow up, DBT of fertilizer subsidy is now in operation on a pilot basis in 11 districts viz. West Godavari, Krishna and Rangareddi [Andhra Pradesh]; Una [Himachal Pradesh]; Hoshangabad [Madhya Pradesh], Pali [Rajasthan], Krishnaganj [Bihar], Karnal and Kurukshetra [Haryana]; Nashik and Raigarh [Maharashtra]
From the next kharif season beginning April, 2017, the scheme will be launched in seven more districts viz. Narmada [Gujarat]; Tumkur [Karnataka]; Malda and South Parganas [West Bengal]; Begusarai [Bihar]; Dhanbad [Jharkhand] and Gorakhpur [Uttar Pradesh].
Under the pilots, as soon as a farmer purchases fertilizer, he has to identify himself – using Aadhaar number or Kisan Credit Cards [KCC] – through a point-of-sale (PoS) device placed with the retailer. Following this, a recommendation of his soil condition and fertilizer requirement is generated, which he may or may not follow.
Thereafter, the difference between the market rate/cost and subsidized price is credited into the bank account of the manufacturer. Initially, the subsidy is paid weekly and then on a real-time basis as and when the system stabilizes. The PoS devices have to be purchased by the companies themselves. About 80% of 7,480 retail outlets in 11 districts have Aadhaar-reading PoS machines.
Over 300,000 tonnes of fertilizer have been sold to farmers in 11 districts under the pilot scheme during the six weeks to mid-February this year. This is a trifle 0.5% of annual fertilizer consumption in India. The government is contemplating a pan-India DBT roll-out. The likely date for launch is June 1, 2017.
The success or otherwise, of any scheme has to be measured on three broad yardsticks. First, does it foster competitive and cost effective mechanisms for delivering fertilizers? Second, is it properly targeted and geared to prevent leakages? Third, does it adequately empower the farmers to ensure optimum and balanced fertilizer use?
At the outset, let us take a look at the existing system. The manufacturers sell fertilizers at a low price and claim excess of cost of supply over it as subsidy from central government. In case of urea, the subsidy varies from unit to unit whereas for decontrolled complex fertilizers, it is ‘uniform’ for all units. 95% of subsidy to urea units [85% to complex manufacturers] is released on sale of material in each district. The balance 5%/15% is paid on confirmation of sales to farmers by the state government.
Does it pass the three tests? First, in urea, considering that under new pricing scheme [NPS], a manufacturer gets subsidy reimbursement on unit-specific basis, there is no incentive to reduce cost as he cannot keep the resultant benefit. In complex fertilizers too, under nutrient based scheme [NBS], though technically subsidy is uniform, payments are adjusted to actual cost data. Besides, delayed release of subsidy increases interest cost hitting even well run units.
Second, the system fails miserably in regard to targeting. This is because all fertilizers are available at low price to all farmers irrespective of whether they are rich or poor/small or large. It won’t prevent diversion either as biggest incentive to divert is its low price. Lured by much higher market price, traders can divert subsidized fertilizers to chemical factories or smuggle out of India.
Third, which fertilizers farmers use, this depends on their retail prices as dictated by the government and not on what their soil and crop needs. For instance, because of much higher subsidy on urea [enabling lower sale price] vis-à-vis complex fertilizers, they use more of former even when the requirement based on soil analysis is more of latter. Clearly, the farmer does not have the power to choose.
Under DBT, subsidy goes to the bank account of beneficiary/farmer. Therefore, it cannot be routed through producers who need to sell fertilizers to farmer at full cost-based or market-based price. This is how LPG subsidy is disbursed under PAHAL [Pratyaksh Hastantrit Labh] scheme in vogue since January, 2015.
A scheme administered in this manner passes all the three tests. First, since, producers sell at market price, there will be competition and fertilizer delivery will be cost effective. Second, all sales being at market determined rate, there won’t be any opportunity for arbitrage hence, no leakage. Third, since subsidy money is going directly to farmer’s account, he gets to spend the way he likes.
But, under the pilot scheme, government won’t credit subsidy in farmer’s account even as he continues to buy fertilizer at subsidized rate. It is continuation of existing system [old wine in new bottle] with the only change that subsidy is paid to manufacturer after sale to farmer. Hence, all the three flaws bedeviling it will persist.
Besides, the modification makes life for manufacturers more miserable. At present, they get 95%/85% of subsidy once the material reaches the district. Under the proposed dispensation, to get the entire subsidy amount released, they will have to wait till the product is sold to farmers. This will aggravate their cash flow problems caused by under-provision in the budget year-after-year [for instance, during current year, there is shortfall of about Rs 30,000 crores].
The scheme under implementation in 11 districts violates the DBT principle as subsidy is not going to farmer’s account. This flaw must be corrected and only then pilots should be run. The imponderables in this regard should be faced head on.
First, subsidy component of the cost/market price being substantial, a farmer may not be able to buy unless the amount is credited to his account in advance. What is the problem in doing that? Under existing dispensation, government has been used to making payments to manufacturers after they have incurred and that too with delay. So, it is just a question of changing the mindset. This will also require adequate allocation of funds and their timely release.
Second, it needs to prepare a list of all beneficiary farmers. The states may not have data especially on tenant farmers [those who do not own land]. That exercise should be taken up in all seriousness and completed on a war footing in a time bound manner. The entire data should be uploaded on the net.
Third, how much subsidy should be given to each farmer? At present, he gets subsidy on whatever quantity he buys without any limit. Under DBT, it can only be on normative basis [farmer-specific subsidy is impossible to administer] and equals quantity of N, P and K use per hectare multiplied by respective per unit subsidy rate.
Fourth, in view of each manufacturer having to sell at market based price, some high cost plants especially those in public sector may face problems. The government will have to shed its current approach of using subsidy mechanism to protect them. Instead, it will have to find other ways of sustaining their viability.
A fair amount of preparedness on all these fronts is a pre-requisite for pan-India roll out of DBT. Clearly, June 2017 is out of question; even if Team Modi can do it by April 2019, that will be a great achievement.