In the Union Budget for 2018-19, the finance minister, Arun Jaitely has made a provision of Rs 70,080 crore for fertilizer subsidy which is just about Rs 5000 crore higher than the revised estimate [RE] for 2017-18 at Rs 65,000 crore and almost the same as the budget estimate [BE] of Rs 70,000 crore for that year.
The international price of crude oil during the ensuing year is projected to be 15-20% higher. Considering that the international prices of urea as also raw materials/feedstock [natural gas, phosphoric acid, ammonia, sulfur] also increase in tandem and India is heavily dependent on their imports, the requirement for subsidy would be higher.
Add to this carry forward of over Rs 30,000 crore from 2017-18. This will further increase the shortfall in BE vis-à-vis the requirement. But, there may be a positive news. This relates to tightening of fertilizer subsidy delivery mechanism.
Under the extant dispensation, manufacturers sell fertilizers at a low price and claim excess of cost of supply over it as subsidy. 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 the district. The balance 5%/15% is paid on confirmation of sales to farmers by the state government.
Beginning September 2017, the government brought about a major change whereby, as soon as farmer purchases fertilizer, he has 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 is generated, which he may or may not follow. Thereafter, the subsidy is credited into the bank account of the manufacturer.
After a modest start with Delhi, the scheme covered 14 states and union territories [UTs] in November 2017; 19 in December, 2017 and 24 in January, 2018. By March 31, 2018, all fertilizer sale outlets in 31 states/UTs would have installed ePoS devices linked to Aadhaar.
Available data during these months show a substantial decline in sales. During November 2017, fertilizers sales were 0.64 million ton down from 1.4 million ton during November 2016. During December 2017, these were 2.5 million ton down from 5.3 million ton during December 2016. During January 2018, these were 3.9 million ton down from 5.4 million ton during January 2017.
The authorities believe that the decline could be attributed to stoppage of diversion/pilferage following authentication of sale made with Aadhaar validated thumb impressions of the farmer captured on the ePoS machines and may have contributed to a saving of about Rs 5000 crore during 2017-18. Further, it expects saving of 30% or about Rs 20,000 crore in subsidy during 2018-19.
The above scenario sounds music to ears. This pre-supposes that all those who did not come forward to buy were persons whose intent was to misuse the subsidized fertilizers but were barred because of the requirement of Aadhaar authentication. There could be other reasons behind decline in sales.
It may well be that farmers who came to buy had less requirement when compared to the corresponding month of previous year. It could also be that some farmers did not have Aadhaar number or KCC [or the ePoS machine didn’t work] and hence had to return without making the purchase. We also need to ponder if it is realistic to extrapolate on the basis of outcome in few months.
Even so, mere insistence on Aadhaar authentication is no guarantee that pilferage will be completely eliminated. This is because fertilizers continue to be sold to farmers at a low price and market/cost based price being much higher, the incentive to divert remains. For instance, farmers can sell subsidized fertilizer to chemical industries for trading profit instead of actually using it on the field. Monitoring farmers on how they dispose off the material will be a herculean task!
One may argue that with mandatory neem coating of urea [this is in vogue since 2015] which renders it unusable in chemical industries, this won’t be possible. But, that again requires a huge monitoring and surveillance machinery to track manufacturers/importers for compliance. Further, it won’t still be possible to stop smuggling to neighboring countries [albeit for use by farmers] where the selling prices are much higher; courtesy, no subsidy in those jurisdictions.
The only foolproof mechanism to prevent misuse of subsidy is to deposit it in the bank account of the farmer and let him buy fertilizers at market/cost based price. That is direct benefit transfer [DBT] in the true sense of the term [not the way the government has done which is mere repackaging of existing system as DBT] as was done in LPG with excellent results.
Concurrently, the government should also remove pricing and distribution controls giving manufacturers/importers freedom of pricing and marketing. Urea imports will need to be freed [currently, these are canalized] even as free import of other fertilizers viz. complexes, DAP, MOP etc is already allowed.
The resulting competition among domestic manufacturers as also with imports will bring about increased focus on efficiency improvement and cost reduction. The industry will be prompted to do more of research and development/innovation [this is missing under the extant dispensation of obtrusive controls] to bring a more diversified basket of products for the benefit of farmers. Eventually, farmers will gain by way of higher crop yield while spending less on inputs.
As the cost of making fertilizers available come down [courtesy, competitive pressure under market driven framework], the government can leverage this for restricting subsidy only to poor farmers as also reduce subsidy payment on every unit of fertilizer. In turn, this will augur well for maintaining overall fiscal discipline.
To conclude, while use of Aadhaar for plugging leakages in delivery of subsidy is welcome, the government should also implement the long pending policy reforms to reap the full potential of saving in subsidy and ensure optimum use of resources.