From an already high of Rs 83,000 crore during 2019-20, the subsidy could cross Rs 200,000 crore during 2022-23.
Fertilizer subsidy or payments made to manufacturers or importers to cover the excess of the cost of production/import and distribution over a low maximum retail price (MRP) – they are asked by the Union Government to charge from the farmers -has increased by leaps and bounds during the last three years. From an already high of Rs 83,000 crore during 2019-20, it increased to Rs 138,000 crore during 2020-21, Rs 162,000 crore during 2021-22 and could cross Rs 200,000 crore mark during 2022-23.
Is there a way this escalating trend could be reined in?
Subsidy payments are made under two broad categories of fertilizers viz. (i) urea; (ii) phosphate or ‘P’ and potash or ‘K’ fertilizers – also branded as non-urea fertilizers. For determining how much payment is made, apart from the quantum of use, we need to focus on two overarching factors: (i) MRP and (ii) cost of supply.
In case of urea, the Government exercises ‘mandatory’ control on MRP and reimburses the manufacturers for the excess of cost over it as subsidy on a ‘unit-specific’ basis under the New Pricing Scheme (NPS). As for non-urea fertilizers, it fixes ‘uniform’ subsidy on per nutrient basis for all manufacturers and importers under the Nutrient Based Scheme (NBS).
There is a fundamental difference in the policy for the two categories. In case of urea, farmers are assured of a fixed (albeit low )MRP even as the manufacturers or importers get reimbursement for all increases in the cost of supply as higher subsidy. In case of non-urea fertilizers however, the producers/importers get a fixed subsidy while, they are free to increase MRP to reflect increase in the cost.
This has led to sharp increase in the prices of P&K fertilizers even as the MRP of urea remained unchanged. Resulting imbalance in price ratio (during 2020-21, the price of di-ammonium phosphate or DAP -a widely used ‘P’ fertilizer – was 4.5 times that of urea) has contributed to increasing imbalance in fertilizer use and adverse effect on crop yield, soil health, environment etc.
The government started 2021-22 with this policy bias against non-urea fertilizers which received an allocation of Rs 21,000 crore against Rs 59,000 crore for urea. But, steep increase in international prices of P&K fertilizers (price of DAP more than doubled over the previous year while, price of urea and muriate of potash or MOP went up three times each) forced Modi to change its stance.
To maintain MRP at same level as during 2020-21, in May, 2021, the government increased subsidy on DAP from Rs 10,000 per ton to Rs 24,000 per ton. In October, 2021, it was further increased to Rs 32,760 per ton (subsidy on three other commonly used P&K fertilizers – was also increased by Rs 2000 per ton each). As a result, the actual subsidy payment on non-urea fertilizers was about Rs 57,000 crore – Rs 36,000 crore higher than budget allocation (BE).
Subsidy payment on urea was Rs 105,000 crore – Rs 46,000 crore higher than BE (courtesy, increase in price of imported urea and price of natural gas). Overall, during 2021-22, the Government spent Rs 162,000 crore on fertilizer subsidy.
For 2022-23, in the hope that prices would decline, the Finance Minister, Nirmala Sitharaman reduced allocation for fertilizer subsidy to Rs 105,000 crore including Rs 60,000 crore on urea and Rs 45,000 crore on non-urea fertilizers. But thanks to the Ukraine crisis, these numbers have gone haywire. Given the profound implications of war, the prices are expected to further increase from the 2021-22 level and stay high for the whole year.
In this backdrop, the government has further hiked subsidy on DAP to Rs 50,000 per ton (likewise on other P&K). As a result, the spend during Kharif (April – September) 2022 alone would be Rs 61,000 crore. For the whole year, it may touch Rs 100,000 crore. With subsidy on urea also expected to be much higher than the BE, the total outgo on fertilizer subsidy would be over Rs 200,000 crore.
India is impacted because no effort was made in the past to reduce dependence on imports which currently is – Phosphate: 90 percent; Potash: 100 percent; Urea: 33 percent; Gas: 50 percent. Efforts to reduce this dependence can pay off only in the long-term.
Meanwhile, the Government needs to address voids in other areas namely large-scale diversion of subsidized fertilizers especially urea; excessive use by farmers; large/rich undeserving farmers getting access to subsidized material; inflated payments made to manufacturers under a cost-plus regime, etc.
Look at diversion of urea which could be as high as 30 percent or around 10.2 million ton in total consumption of 34 million tons (2021-22). Eliminating it can yield saving of about Rs 32,000 crore (10.2×31,000/-being the average subsidy per ton). Additionally, even if urea use efficiency improves by 10 percent, this will yield further savings of about Rs 7,500 crore [(34-10.2)x0.1×31,000].
Likewise, significant savings are possible if subsidy is denied to medium and large farmers (land holding > 2 hectare). Taking their consumption to be about 25 percent or 6 million tons, excluding them from the scheme will save around Rs 19,000 crore (6×31,000). All these savings add up to Rs 58,500 crore.
Rationalizing payment to manufacturers by encouraging low-cost firms to supply more and at the same time, discouraging high-cost firms will also help in generating more savings. There is also ample scope for improving efficiency and reducing cost at various levels in the supply and distribution chain.
All of the above things are doable. But this will require a major overhaul of the pricing and subsidy regime. The Government should stop routing subsidy through manufacturers; instead, it may be given as direct benefit transfer (DBT) to the farmers on per hectare basis (albeit to marginal and small farmers). The manufacturers/importers should be free to sell at market determined price. Urea import should be freed even as import of non-urea fertilizers is already free.
This will ensure adequate competition amongst suppliers and survival of the fittest, i.e., those who can supply at low cost. With no subsidized fertilizer in the market (as subsidy goes to farmer’s account), diversion will be completely eliminated. Moreover, in view of MRP reflecting fertilizer’s true cost, farmers will use judiciously – taking into account soil/crop requirement – leading to improved efficiency of use and reduction of imbalance in fertilizer use.
The Government also needs to look into the extant taxation structure. Currently, all fertilizers attract GST (Goods and Services Tax) @ 5 percent. Phosphoric acid and ammonia (raw materials used for making P&K fertilizers) attract GST @ 12 percent and 18 percent respectively. Natural gas (it is outside GST) attracts VAT which can go up to a high of 21 percent say in Uttar Pradesh.
It makes no sense to impose tax on fertilizers only to be reimbursed as additional subsidy. Gas should be brought under GST and put under 5 percent slab. GST on phos acid and ammonia should be lowered from existing 12 percent/18 percent to 5 percent each.
The DBT regime can help in drastically reducing subsidy even in the face of high international prices of fertilizers. But, kicking these reforms will require taking the bull (read: all those who are unfairly benefiting from the existing dispensation) by the horns.
(The writer is a policy analyst. The views expressed are personal.)
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