A subsidy policy hamstrung by a desire to contain it

The government has approved transportation of fertilisers through coastal shipping and inland waterways. This is a welcome move as it offers the possibility of significant reduction in freight cost, besides lesser time in reaching the material to consumption points and being environment friendly as well.

It has also approved freight subsidy to manufacturers on the cost incurred on movement of fertilisers via this mode. In case of single mode or multi-modal transportation, which includes coastal shipping, ‘the freight subsidy will be restricted to railway charges or the actual freight incurred, whichever is less’. Further, ‘only movement of subsidised indigenous fertilisers, viz., urea and phosphate and potash fertilisers – through coastal shipping/inland waterways will be eligible for payment of freight subsidy at this stage.’

The crucial question is whether the intended benefit will actually accrue. This will depend on whether or not manufacturers get a conducive policy environment.

Considering the crucial role played by fertilisers in increasing food production and the overarching need to make it affordable to farmers, the Centre has followed a policy of controlling their maximum retail price (MRP) at a low level unrelated to their cost of production and distribution, which is higher. To ensure that production is viable at this price, it gives subsidy to the manufacturer to reimburse the difference between the two.

In case of urea, the subsidy varies from unit to unit and is administered under the New Pricing Scheme (NPS) whereas for decontrolled complex fertilisers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme (NBS). Since this is subject to submission of cost data by individual units and necessary adjustment in subsidy thereof, de facto even this turns out to be unit-specific.

Considering India’s high dependence on import for meeting its fertiliser requirements viz. nearly 2/3rd in nitrogen, 90% in phosphate and 100% in potash, the government also gives subsidy on imported material. The subsidy amount is equal to the landed cost of imports plus internal movement and distribution cost over the MRP.

As regards freight cost, this is reimbursed to urea manufacturers under a uniform freight policy. The subsidy covers transportation of urea from plant/port to the block/district, which includes primary movement by rails and secondary movement from the unloading rake point by road to the retail distribution point.

For manufacturers of decontrolled complex fertilisers, in addition to flat/uniform subsidy, freight on account of primary movement of all P&K fertilisers (except single super phosphate (SSP)) is reimbursed on the basis of actual rail freight, as per the railway receipts. However, no reimbursement on account of secondary movement of P&K fertilisers (including SSP) is provided.

In the above scheme of things, if a manufacturer also uses coastal shipping or/and inland waterways as a mode of transport either in conjunction with rail or road, it automatically follows that this will have to be taken into account while computing freight subsidy. The decision of the department of fertilisers endorses this obvious point. However, a proviso ‘freight on railway charges or the actual whichever is lower’ will act as a disincentive.

Under a multi-modal arrangement involving coastal shipping or/and inland waterways, the actual freight will most likely be less. Now, if, the manufacturer gets reimbursement for the lower amount only —as envisaged — then there is no incentive for him/her to switch over. On the other hand, if the actual turns out to be higher but he gets compensated only to the extent of lower freight on rail, then he will suffer a loss. It boils down to a typical case of ‘heads I win, tails you lose’.

According to the ministry of shipping, 9-10 million tons of fertilisers is likely to be moved through coastal shipping or/and inland waterways by 2025-26. On this basis, the decision would save around Rs 1,000 crore annually in freight cost. But that would be possible only when the manufacturers actually make a switch-over. But the policy environment does not appear to favour this.

The government also seeks to restrict freight subsidy only to ‘indigenous subsidised fertilisers, viz. urea and phosphate and potash fertilisers.’ Excluding imported fertilisers (these account for a significant portion of total consumption) from the subsidy dispensation is unjust and inequitable. The use of inland waterways is particularly advantageous for imported fertilisers, which land at the port and need to be moved over long distances to reach the consumption point. Yet, their exclusion from the scheme is anomalous.

The idea of encouraging movement by inland waterways is good. However, for this to yield the desired result, the policy should have an element of ‘incentive’ for manufacturers to make it happen. Besides, it should cover all supplies, including imports. Unfortunately, the bureaucrats have failed to address both.

Ironically, most of the policy moves in the fertiliser sector during the last three decades or so have been guided by an obsession of successive governments to reduce subsidy outgo without addressing the real factors behind its rise, namely the control on MRP at an ‘artificially’ low level and unabated increase in the cost of raw materials such as natural gas, phosphoric acid, ammonia, rock phosphate, etc.

Thus, they have resorted to tightening of pricing/subsidy determination norms, inadequate reimbursement for various costs including escalations and delayed payments (despite these measures which affected the health and growth of the industry, the subsidy has continued to balloon as the fundamental factors remain unaddressed). The present decision to give freight subsidy ‘on rail charges or the actual whichever is lower’ is only a continuation of this pattern.

Our policymakers will have to shed their narrow mindset, or else the very purpose of this innovative step, namely fertiliser movement by coastal shipping and inland waterways, will be defeated.

(The writer is a New Delhi-based policy analyst)