Even as Modi – government has taken plenty of action on reforming a variety of subsidy schemes viz., LPG, food, kerosene etc during the last 30 months of its stint, fertilizer subsidy has received scant attention. In his budget speech for 2016-17, finance minister, Arun Jaitely stated :-
“We have already introduced a direct benefit transfer (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.”
The focus on DBT links up with a startling revelation made in the Economic Survey [2015-16]. It stated that “24% of the fertilizer subsidy is spent on inefficient producers, 41% is diverted to non-agricultural uses [including smuggling to neighboring countries] and 24% is consumed by larger – presumably richer farmers”.
This means that a tiny 11% of the subsidy goes to poor/small and marginal farmers. The spend by central government on fertilizer subsidy being around Rs 70,000 crores [2016-17], the poor get only Rs 7700 crores despite the fact that they alone should be the sole beneficiary scheme as promised by Modi.
In this backdrop, it was only apt that the government took timely corrective action by putting in place a scheme under which subsidy is targeted only to the poor and misuse of resources can be avoided and. Indeed, the Survey had strongly advocated DBT of fertilizer subsidy to the bank accounts of beneficiaries using the JAM [Jan Dhan–Aadhaar–Mobile] platform.
Yet, all that we see is DBT on a pilot basis in 16 districts. Currently, it is in operation in 2 districts viz., Krishna and West Godavari in Andhra Pradesh. For remaining 14 districts, the Centre plans to start work from December. But, that won’t be a good time to start as much of Rabi sowing season would have already passed [pilot has meaning only when it is launched before the season begins].
A trial run by itself does not ensure that scheme will actually be launched. The proof of pudding is in eating. In 2012-13, the UPA – government had also contemplated trial runs followed by full throttle launch in April, 2014 covering the whole of India. But, the plan remained on paper. There is no guarantee that Modi – dispensation will make it happen.
Ironically, even the pilot is wrongly conceived and is completely out of sync with the basics of DBT. To get an idea, let us first look at how the existing system works.
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’. 95% of subsidy to urea units and 85% to complex manufacturers is released on sale of material in each district [for this, they have to submit receipt duly authenticated by chartered accountants]. The balance 5%/15% is paid on confirmation of sales to farmers by the state government.
Under DBT, as the wording suggests, subsidy should go directly to the bank account of beneficiary/farmer. Logically, therefore it cannot be routed through producers who need to sell fertilizers to the farmer at full cost-based or market-based price. This is precisely what is being done for giving subsidy on LPG under PAHAL [Pratyaksh Hastantrit Labh]. But, under the pilot for fertilizers, this principle has been thrown to the winds.
Under it, the Centre won’t credit the subsidy in farmer’s bank account and he will continue to buy fertilizer at subsidized rate. As soon as he purchases fertilizer, he will have 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 will be generated, which he may or may not follow.
Thereafter, the difference between the market rate and subsidized price will be credited into the bank account of the manufacturer. Initially, the subsidy will be paid weekly and then on a real-time basis as and when the system stabilizes. The PoS devices will have to be purchased by the companies themselves.
This sort of architecture is not DBT. Any scheme which does not involve crediting subsidy directly in to beneficiary’s account cannot be termed DBT. What is being done is continuation of existing system [old wine in a new bottle] with changes that will make life more miserable for manufacturers.
At present, they get 95%/85% of subsidy once the material reaches the district. Only 5%/15% is dependent on sales to farmers. Under proposed dispensation, to get the entire subsidy amount released, they will have to wait till the product is sold to farmers. Already, they are facing serious cash flow problems due to delay in release of subsidy dues [due to under-provision in the budget]. Making release of entire amount contingent on sale to farmers will compound their woes.
Moreover, subjecting them to controls [inevitable when they are forced to sell at low price as per government’s diktat] and yet paying them subsidy on market based price is anomalous. If, the intent is to move producers towards a market driven price then, why not leave them free to sell at that price? Why ride piggy back on them for delivering subsidy to farmers?
Will it achieve better targeting? The answer is an emphatic ‘no’. This is because fertilizer will continue to be available at low price to all farmers irrespective of whether he/she is rich or poor/small or large. It won’t prevent diversion either as the biggest incentive to divert is its low price. Lured by much higher market price, dubious traders can always find ways to sell subsidized fertilizers to chemical factories.
Clearly, the version of DBT being tried in pilot districts is flawed. It will provide no proper guidance in judging the effectiveness or otherwise of the scheme. It won’t be of any help in dealing with the maladies as pointed out in the Economic Survey.
A plausible reason as to why the government does not want to embrace DBT in its real form is absence of data on millions of those farmers who do not own land but do farming. If that be so, then, the right course would be to build their data base along with owner/cultivators and put in place requisite IT and banking infrastructure.
To begin with, this preparatory work may be done in the identified districts. Only thereafter, the government should latch on to DBT but without compromising on the basics viz., subsidy should go to farmers account only even as manufacturers sell fertilizers at market price.