For the first time, in the nearly five decade history of implementing the Fertilizer Subsidy Scheme, the Union Government has decided to dip into the Oil Industry Development Fund (OIDF) to finance a portion of the subsidy requirement under the Scheme. The amount to be drawn from the OIDF is Rs 13,000 crore in the revised estimates (RE) for financial year (FY) 2024-25 and Rs 24,600 crore in Budget estimate (BE) for FY 2025-26.
In the backdrop of successive and steep increases in the international prices of crude oil and petroleum products since early 1973, and urgent need for achieving progressive self-reliance in petroleum based industrial raw materials, in 1974, the then government set up the OIDF by enacting the Oil Industry (Development) Act, 1974.
The Act provided for levy of a cess/excise duty on crude oil (later its ambit was expanded to include natural gas) produced in the country and delivered to the refineries to be utilized for approved schemes in the fields of oil exploration and production, and the refining, marketing and distribution of petroleum products and research and development. In due course, the scope of the Fund was extended to cover other sectors such as the down-stream processing of petroleum feed stocks.
Fertilizer subsidy is payments made to manufacturers or importers to cover the excess of the cost of production/import and distribution (or cost of supply) over a low maximum retail price (MRP) they are directed by the Union government to charge from the farmers. The subsidy on each ton of fertilizer produced (or imported) and sold is the difference between the cost of supply and MRP. Multiplied by the total quantity of fertilizer sold, it gives aggregate subsidy payments.
In the case of urea, MRP is under ‘statutory’ control. The excess cost of supply over MRP is reimbursed to the manufacturer as subsidy which varies from unit to unit depending on the cost. These reimbursements are made under the so-called New Pricing Scheme (NPS). For non-urea fertilizers which are de jure decontrolled, the MRP is ‘indirectly’ controlled. The government gives a ‘uniform’ subsidy on a per-nutrient basis to all manufacturers and importers under the Nutrient Based Scheme (NBS). The latter must deduct this from the cost to arrive at the MRP. All these exercises/determinations are made by the fertilizer ministry to arrive at the estimates of subsidy requirements under each category viz. urea and non-urea fertilizers.
During the last five years, the Centre’s outgo on fertilizer subsidy has consistently remained well above the Rs 100,000 crore – FY 2020-21: Rs 137,000 crore; FY 2021-22: Rs 162,000 crore; FY 2022-23: Rs 251,000 crore; FY 2023-24: Rs 195,000 crore; FY 2024-25: Rs 170,000 crore. For FY 2024-25, while this is the revised estimate (RE) as given by Finance Minister Nirmala Sitharaman in the Union Budget for FY 2025-26 presented on February 1, 2025, she has taken approval for a further Rs 14,100 crore under the supplementary demands on March 10, 2025. That takes the total for current FY to Rs 184,000 crore. For FY 2025-26, the BE is Rs 167,000 crore.
We also see a trend whereby the actual subsidy outgo during a FY is invariably higher than the BE. During FY 2022-23, the actual at Rs 251,000 crore was more than double the BE of Rs 105,000 crore. During FY 2023-24, the actual was Rs 195,000 crore against BE of Rs 175,000 crore. During FY 2024-25, the actual expenditure of Rs 184,000 crore exceeded the BE of Rs 164,000 crore by Rs 20,000 crore. The scenario during FY 2025-26 is unlikely to be different.
How is the subsidy funded?
Generally, the government has been meeting the entire expenses on fertilizer subsidy from the Union Budget. However, during 2008-09 when the bill exceeded Rs 100,000 crore (courtesy, global financial crisis), it issued ‘fertilizer bonds’ to fertilizer manufacturers in lieu of subsidy receivables. Prior to FY 2020-21, it also took recourse to what in jargon was called ‘extra-budgetary resources’ or EBRs in short. The glamorous arrangement allowed fertilizer companies take loans from banks and financial institutions against subsidy dues from the Centre thereby enabling the latter keep these liabilities off its balance sheet thus rein in fiscal deficit (FD) – albeit artificially.
Beginning the FY 2020-21, Sitharaman ended this practice by ‘fully’ funding the subsidy from budgetary allocation. Now, in view of Modi – government pledge to pursue its fiscal consolidation drive vigorously (having achieved FD of 4.8 percent of GDP during FY 2024-25, it has targeted a further reduction in FD to 4.4 percent for FY 2025-26), it has started feeling the stress. This has prompted the mandarins in the finance ministry to take recourse to funds transfer from the OIDF for meeting a portion of the expenditure on fertilizer subsidy.
Is such transfer justified?
Under the Oil Industry (Development) Act, 1974, the funds collected in the OIDF can only be utilized for approved schemes in the fields of oil exploration and production, and the refining, marketing and distribution of petroleum products and research and development. Fundamentally, these are in the nature of capital expenditure aimed at augmenting indigenous production capabilities thereby furthering the objective of achieving self-reliance in oil and natural gas (NG). India being dependent on imports for meeting over 85 percent of its requirements of crude oil and 50 percent of NG currently, the need for pursuing this objective at a greater pace can’t be overstated.
To transfer funds from the OIDF for meeting a portion of the expenditure on fertilizer subsidy not only militates against the objective but will also be counter-productive as the spend on fertilizer subsidy is in the nature of revenue expenditure; it won’t lead to creation of capital assets. The government shouldn’t ignore this negative fallout in its obsession to trim FD in the short-term.
Instead of adopting disingenuous method of pruning FD (this is what transferring funds from a ‘dedicated fund’ tantamount to), the government should look for ways to reduce fertilizer subsidy. Indeed, it is possible to bring about substantial savings. To get a sense, let us look at the Economic Survey (ES) 2015-16.
According to the ES, as much as 24 percent of the subsidy is spent on inefficient producers, 41 percent is diverted to non-agricultural uses including smuggling to neighboring countries, and 24 percent is consumed by larger, presumably richer farmers. That leaves a tiny 11 percent going to small and marginal farmers who constitute an overwhelming 86 percent of the total number of farmers and should be eligible to get subsidy.
By addressing these leakages/misuses, the government can bring about substantial reduction in subsidy. In the last ten years, it has taken several administrative steps such as neem coating of urea, release of subsidy to manufacturers only on fertilizer sale to farmers etc. But, these have failed to make a dent as the root cause remains unaddressed. This has to do with routing subsidy through manufacturers which enables them to sell at an artificially low MRP. This is an open invitation to dubious operators divert the subsidized material for making illicit gains and no amount of tracking and policing can help in preventing it.
The way forward is to stop routing subsidy through fertilizer manufacturers; instead give it directly to farmers using the DBT (direct benefit transfer) mechanism.
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