Fertiliser subsidy:policy reforms needed, not tinkering

Considering the crucial role played by fertilisers in increasing food production and the overarching need to make it affordable to farmers, the union government has followed a policy of controlling their maximum retail price (MRP) at a low level, unrelated to the cost of production and distribution. 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, the subsidy on even the latter turns is unit-specific.

Prior to Rabi 2017-18 (October 2017 — March 2018), 95% of the subsidy to urea manufacturing units and 85% to complex manufacturers was released on sale of material in the district. The balance 5-15% was paid on confirmation of sales to farmers by state government.

The arrangements were beset with several maladies, namely, diversion of subsidised fertilisers to chemical industries and smuggling to neighbouring countries where prevailing prices are higher (courtesy, no subsidy); delayed payment of subsidy to manufacturers; lack of pressure on the producers to reduce cost; and excessive dependence on imports.

Beginning October 2017, the Centre affected a major change in the mechanism of subsidy payment. Under the new direct benefit transfer (DBT) system, 100% of the subsidy is credited into the bank account of a fertiliser manufacturer based on actual sales made by the retailer to the farmer. This is done after the farmer authenticates the purchase with his Aadhaar card — through a point-of-sale device at the dealer shop.

By March 31, 2018, ePoS devices linked to Aadhaar were installed at all fertiliser sale outlets (about 2,00,000) in 31 states/union territories, thereby enabling commencement of subsidy payments all over India under DBT from April 2018. According to the department of fertilisers (DoF), during April-July 2018, about15.55 million tonnes of fertilisers were sold under DBT scheme. The moot question is, whether the new dispensation will make a dent on the aforementioned problems.

True, with Aadhaar-based authentication of each sale/purchase at the retailer level, backed by tracking of physical movement under a mobile Fertiliser Monitoring System (m-FMS) (launched in 2013-14, this provides information on stock position, sale and receipt of fertilisers till the last retail point), there is a much higher level of accountability on all stakeholders in the supply chain, namely, manufacturers, wholesalers and retailers. It also brings about greater transparency in operations.

The system also bypasses states in as much as it does not require their approval before the balance subsidy payments (5-15% for urea/complexes) are released to the manufacturers. But, it gives no fool-proof guarantee against pilferage as the fundamental cause remains unaddressed. When subsidised urea is available from the retailer at a price that is half or even a quarter of the cost (or the price at which it would sell without subsidy), there will always be incentive to divert it. The surveillance under m-FMS and Aadhaar-verified sale cannot eliminate this.

For instance, a small farmer can be enticed to buy more than his requirement (the regulations don’t impose any cap on the quantity) and he can transfer the excess to a chemical factory. The neem coating of urea (mandatory since 2015-16), which makes it unsuitable for use in chemical factories, can be helpful only if the government has the machinery to track and check a mammoth 600 million bags. That is a herculean task. Apart from requiring deployment of manpower leading to extra burden on state finances, this can also breed corruption. Furthermore, even if urea can be checked for neem coating, the incentive to smuggle and sell the subsidised material in neighbouring countries would still remain.

Persistent issue

As regards the problem of delayed payments to fertiliser companies, this won’t go away despite the promise of the government to release 100% amount after sale by the retailer. This is because year after year, the provision for fertiliser subsidy in the budget has been consistently lower than the requirement. For instance, during 2017-18, the shortfall was Rs 40,000 crore.

So, the assertion of DoF that, under DBT, payments to the manufacturers are being made within a week of generation and submission of bill online does not carry conviction. It may well be that during the first half of the year dues are cleared promptly, but when available funds dry up towards the latter half, payments get delayed.

Finally, the new scheme does little to force manufacturers improve efficiency and reduce cost as the extant system of giving them subsidy on unit-specific basis under NPS continues. In this scenario, where there is no incentive to invest in new fertiliser capacity, high dependence on import is unavoidable.

What, then, is the way forward? The government should stop routing subsidy through manufacturers; instead, this should be credited to the account of farmers.

The manufacturers will be free to sell fertilisers at market prices and won’t have to suffer the stress of delayed subsidy payments. This scenario will also be completely free from the menace of diversion. Moreover, the subsidy can be better targeted, resulting in savings.

A market-driven regime (with subsidy going directly to farmers) will unleash competition amongst manufacturers, incentivise them to reduce cost and innovate to bring customised solutions in sync with farmers’ needs. It will enable farmers to put the subsidy to best use and enhance fertiliser-use efficiency. In short, Prime Minister Narendra Modi should go for big bang policy reforms, instead of the current approach, which is focused on streamlining the extant subsidy scheme with technology.

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