Those of us expecting big bang announcement in budget for 2015-16 in regard to fertilizer reforms may have been disappointed.
The budget for 2014-15 had mentioned that the government would set up an Expenditure Reforms Commission (ERC) on rationalizing subsidies. ERC under Dr Bimal Jalan ex-governor, RBI submitted its interim report about a month back which heightened the possibility of major initiatives being taken in this budget. Yet, in his speech, finance minister maintained a stout silence.
Are we then to conclude that government has missed an opportunity to reform the sector yet again? Such a conclusion may be a bit premature if one were to take a cue from post-budget briefing of Chief Economic Adviser (CEA), Arvind Subramanian and Minister of State (MoS) Finance, Jayant Sinha.
CEA referred to absolute commitment of government to improve targeting of subsidies and eliminating leakages to be achieved through direct benefit transfer (DBT) using JAM [Jan Dhan Yojna (JDY), Aadhaar and mobile numbers] platform. Sinha reinforced this claim stating that this alone will save 25-30% in subsidy. He also alluded to work-in-progress on new urea policy.
DBT is a revolutionary concept whose implementation will not only yield substantial saving in subsidy by curbing leakages but also end distortions in resource allocation and inefficiencies in supply chain germane to existing dispensation of subsidizing fertilizers through lower selling prices. But, the government needs to do lot of ground work before this is put in place.
The creation of a financial and IT (information technology) architecture for direct transfer of subsidy to beneficiaries is a pre-requisite. In this regard, government has done a tremendous job by opening over 120 million accounts under JDY. Together with issue of about 700 million Aadhaar cards and their seeding on bank accounts, the infrastructure may soon be ready for kicking off DBT.
Under extant dispensation, all farmers including better-off/rich get benefit of subsidy as they all pay same the subsidized price. DBT must be free from this anomaly. Therefore, government should restrict subsidy payment only to small and marginal (resource poor) farmers or those having cultivable land 1-2 hectares and up to 1 hectare respectively. Towards this end, banks must seed data on holding size and income on the accounts under JDY.
The government needs to cross another major hurdle before it can think of launching DBT. This one relates to setting right the extant highly convoluted system of producer pricing for urea or so called new pricing scheme (NPS) under which each manufacturing unit is paid subsidy on the basis of its production cost.
The cost ranges from about Rs 11,000 per ton for efficient gas based plants, Rs 15,000 per ton for other high cost gas based units and over Rs 40,000 per ton for naphtha-based plants. The system also subsidizes imported urea which depending on landed cost may range from Rs 25,000 – 30,000 per ton or even higher Rs 45,000-50,000 per ton as happened in 2008-09.
Now, if subsidy has to be paid directly to farmers, payments to manufacturers will have to stop. If this is done abruptly, it may lead to a chaotic situation whereby high cost units will be rendered unviable leading to closure. In the hit list will be several undertakings in the public/state sector viz., FCIL, BVFCL, MFL, FACT, SPIC etc. Indeed, that is a big worry for government.
It also needs to think through maintaining adequate indigenous supplies which could plunge in the event of large scale closure of plants. It cannot risk a situation where India is forced to import much larger quantities of urea (on top of already high 8 million tons) and associated exploitation in the international market.
Consequently, before the big bang DBT, NPS should be replaced by nutrient-based scheme (NBS) under which subsidy is paid to all manufacturers at a uniform rate say Rs X per unit of nitrogen. All non-urea fertilizers such as DAP, other complex fertilizers, MOP, SSP etc are already covered under NBS since April 2010. This will have 3 positive spin offs.
First, by aligning the policy dispensation for urea with that of non-urea fertilizers, this will bring parity in their retail prices (presently, latter sell at 3-4 times price of former) and thus help in reducing imbalance in fertilizer use. In turn, this will improve fertilizer use efficiency, crop yield, soil health and the environment.
Second, it will force high cost manufacturers to improve efficiency and reduce cost on one hand and adequately reward low cost units for their better efficiency. It will unleash competitive forces and drive the industry towards innovative products and better solution to farmers. Already, in non-urea segment, NBS has delivered. This needs to be replicated in urea too.
Third, it will create a predictable and conducive policy environment for investors to take a favorable look at fertilizer industry. The industry that has lived through one-and-half decade of near stagnation (not even one urea plant – grass root or brown-field – was put up) will get the much needed boost.
With uniform price of gas (feed stock in urea production) @ US$ 5.61 per million Btu (British thermal unit) for all domestic sources of supply viz., fields awarded under NELP (new exploration licensing policy), pre-NELP where price needs government approval under production sharing contract (PSC) and nomination fields since November 1, 2014, all units would be facing similar feed stock cost environment.
But, landed cost may be different depending on location of the plant due to inter-state variations in VAT. Under NBS regime, this may give some units edge over others. However, this must not detract government from immediately going ahead with the long pending reform. Even so, with GST slated for implementation from April 2016, all units will face a level playing field.
The NBS may be kept in vogue for say 2-3 years to acclimatize manufacturers to the rigors of uniform pricing. At the end of it, the government may stop routing subsidy through industry and put in place direct transfer to farmers using JAM.