In the Union Budget for 2022-23 presented by the Finance Minister, Nirmala Sitharaman on February 1, 2022, Modi – government has allocated Rs 105,000 crore for fertilizer subsidy which is Rs 35,000 crore less than the actual expenditure of Rs 140,000 crore during the current year as per the revised estimate (RE).
Fertilizer subsidy arises because the Union Government wants manufacturers/imports to sell fertilizers to farmers at a low maximum retail price (MRP), unrelated to the cost of production and import and distribution, which is much higher. In case of urea, it 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. In case of phosphatic and potassic (P&K) fertilizers, it fixes ‘uniform’ subsidy on per nutrient basis for all manufacturers and importers under Nutrient Based Scheme (NBS).
The three basic factors impacting subsidy are MRP, per unit cost of supply and the quantity of fertilizer use. The reduction in allocation for 2022-23 points towards three possibilities. Either, the government intends to go for a significant increase in MRP or it is expecting reduction in the unit cost of supply. Thirdly, there could be reduction in the quantity of fertilizer used.
In her speech, Sitharaman has referred to Modi – government decision to set up an ‘organic farming corridor’ along the banks of River Ganga. Essentially, such farming practice involves use of natural source of plant nutrients such as farm yard manure/cow-dung hence, totally free from use of chemical fertilizers. Can this help in substitution of chemical fertilizers on a significant scale? this is yet to be tested; in any case, it won’t be possible in a short span of one year. So, the third scenario is ruled out.
How about increase in MRP? Considering that the current MRP of P&K fertilizers are already high (for instance, it is Rs 24,000 per ton for DAP), it is unlikely that the Government will hike it.
On the other hand, the current MRP of urea being Rs 5360 per ton – far removed from the cost of supply Rs 25,000 per ton, Rs 30,000 per ton, Rs 35,000 per ton even higher depending on source of supply, there is lot of scope here. A hike of say 200 percent can yield savings of about Rs 35,000 crore (5360x2x33 – 33 million ton being the consumption urea). Given the past record of literally no increase during the last two decades or so, this is day-dreaming.
Coming to cost of supply, India is heavily dependant on import in all fertilizer categories. In case of P&K fertilizers, nearly 50 percent of di-ammonium phosphate (DAP) requirement is imported whereas muriate of potash (MOP) is entirely imported. Even for their domestic production, all of the raw materials (RMs), viz., phosphoric acid, ammonia needs are imported.
In case of urea, 1/3rd of its requirement is imported. Even for the balance 2/3rd quantity produced domestically, India depends on imports of natural gas (NG) to the extent of 1/3rd . So, there is little that India can do to lower the cost which is impacted fundamentally by global demand-supply forces. During 2021-22, there was steep increase in prices of all fertilizers and RMs; the price of DAP more than doubled while, price of urea and MOP went up almost three times each. If, the prices remain at elevated level during 2022-23 then, even this route is shut.
With no scope of subsidy reduction on any of the three routes, the government will seek more money from the parliament to make up for the under-provision in the budget. It did so during 2021-22 when approval for Rs 60,000 crore was taken in addition to the budget provision of Rs 80,000 crore. During 2020-21 also, it had gone for an additional Rs 64,000 crore on top of budgetary outlay of Rs 70,000 crore. It can do the same next year also.
In a way, the Covid pandemic has come as a blessing in disguise. It enabled Modi – government to substantially relax fiscal deficit (FD) target: 9.5 percent of GDP during 2020-21 and 6.9 percent of GDP during 2021-22. The resultant cushion of extra borrowings helped it pay for high fertilizer subsidy in both these years. For 2022-23 also, the budget keeps FD at 6.4 percent which in absolute terms works out to around Rs 16,60,000 crore.
In this backdrop, even if the government has to spend on fertilizer subsidy the same amount as last year or even more, it will have a smooth sail. But, what would happen when it returns to fiscal discipline. Instead of waiting for that day (when it could be forced into taking desperate measures) why does it not start working on hard options?
It is well known that there is rampant misuse/leakage of urea subsidy – estimated to be at least 30 percent. This is primarily because urea is available at a heavily subsidized price. At a stroke of the pen, it can be eliminated if only the government goes for direct benefit transfer (DBT) of subsidy to farmers even as all manufacturers sell at market determined price. This will straightway cut urea demand (albeit represented by diversion/leakage) by 30 percent or 10 million tons; India need not import even a ton.
Similar outcome are expected in the P&K segment though to a lesser extent as subsidy component in these fertilizers is over 50 percent against 80 – 90 percent in case of urea. There will be an indirect gain as well. India being a major importer, a significant cut in its import will reduce the international price thereby reducing the cost of imports and in turn, subsidy.
Additionally, it will curb excessive use of urea; when, the product carries the right price tag, farmers will use it judiciously. It will also be possible to deny subsidy to the undeserving (read: large/rich farmers) and target it to poor farmers only.
The gains from this fundamental transformation in the way fertilizer subsidy is administered are huge and sustainable. But, its implementation requires strong political will. Will Modi act?