The government should stop channeling subsidies through manufacturers and provide them as a direct transfer of benefits

The fertilizer subsidy mania of the past three years has policy makers worried, especially the Union’s finance ministry, which has to foot the bills. The fertilizer subsidy is 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, the government’s asking price). Union to charge farmers).

These payments fall into two broad categories, viz. (i) urea, the main source of nitrogen or “N” supply; (ii) phosphate or ‘P’ and potassium or ‘K’ fertilizers – commonly referred to as non-urea fertilizers – popular fertilizers in this category being diammonium phosphate (DAP) and muriate of potash (MOP).

In the case of urea, the government exercises “compulsory” control over the MRP and reimburses manufacturers/importers for the excess cost of production (C&F landed cost in the case of imports) and distribution or “cost of supply”. brief on MRP as a subsidy on a “unit specific” basis under the New Pricing System (NPS) in vogue since 2003. For fertilizers other than urea, it sets “uniform” subsidies on a per-nutrient basis for all manufacturers and importers under another scheme called the Nutrient Based Scheme (NBS) introduced in 2010.

The two most crucial factors influencing the subsidy are: (i) the cost of supply and (ii) the MRP, as the subsidy on each tonne of fertilizer produced (or imported) and sold is nothing other than the difference between the two.

The total quantity of fertilizer sold is the third important factor which, when multiplied by the subsidy on each ton, gives overall subsidy payments, as reflected in the budget.

India is heavily dependent on imports to meet its fertilizer needs, with the extent of dependency in each fertilizer segment being phosphate (90%), potash (100%), urea (33%), gas (50%). Their cost when landed on Indian shores is determined by the interplay of global supply and demand forces.

Then there are additions such as customs duties (CD), port handling and internal transport costs in case of importing fertilizer in finished form and the “processing cost” (a catch-all phrase for cost of raw materials or RM, interest, depreciation, return on equity; general expenses including wages and salaries, packaging, etc.) in case the fertilizers are produced in India at the imported RM help. Then there are taxes and duties.

Apart from CD on imports of non-urea and MR fertilizers at 5% (except rock phosphate and sulfur which attract 2.5%), all fertilizers are subject to GST (goods and services) at 5%.

Phosphoric acid and ammonia (RMs used to manufacture urea-free fertilizers) are subject to GST at 12% and 18% respectively. Natural gas (it’s excluding GST) attracts VAT which can go up to 21%, say in Uttar Pradesh.

Given the above, the cost of supply is largely beyond the control of manufacturers and importers. As for the MRP, here again, given the political fallout from any rise, particularly in urea, no government dares touch it. The importance of its role can be assessed from the following elements:

In his speech on the budget for 1998-99, Yashwant Sinha, Minister of Finance under the Vajpayee government, had proposed an increase of Rs 1,000 per tonne of the MRP of urea. However, in order to avoid giving the impression that the increase was significant, he presented the increase as being 1 Re per kg instead of expressing it per tonne, which is the normal practice. But the trick didn’t work. Sinha was forced to cancel 50% of the trek the next day and balance out in less than two weeks.

Believe it or not, for nearly two decades since 2002, there has been no increase in urea MRP (minus a marginal 10% increase in 2010). Even for non-urea fertilizers, although the NBS allows an increase in their selling prices, the Modi government has de facto frozen them as well since April 2021.

Paralyzed by the above factors, successive governments have watched helplessly as fertilizer subsidies continually rise to alarming proportions in recent years. It was only in 2008-09 that it broke the 100,000 crore mark. Now we see this happening for three consecutive years. During 2020-21 and 2021-22, the grant outflow was `138,000 crore and

`162,000 crore, respectively. In 2022-2023, it is expected to hit the 250,000 crore mark.

What is the road to follow? The answer is hidden in an analysis by the Chief Economic Adviser (CEA) in the FY Economic Survey 2015-16. According to her, as much as 24% of the subsidy is spent on inefficient producers, 41% is diverted to non-agricultural uses, including smuggling to neighboring countries, and 24% is consumed by larger farmers, presumably more rich. That leaves a tiny 11%. 100 for small marginal farmers who should benefit most from the subsidy.

Look at the diversion of urea which could reach 30% currently despite the much advertised neem coating (as of 2015-2016 all manufacturers/importers are required to do so). Out of total annual sales of 35 million tonnes, the amount so diverted not deserving of subsidy amounts to approximately 10.5 million tonnes. Taking the average subsidy per tonne of `71,400/- (250,000/3.5), eliminating diversion can generate savings of around Rs 75,000 crore.

From the total sales, deduct the quantity diverted, we obtain the quantity of urea actually used by the farmers. This is equivalent to 24.5 million tons (35 – 10.5). Of this total, the consumption of medium and large farmers (land over 2 hectares) is around 25% or 6.1 million tonnes. If they are excluded from the subsidy scheme, this will result in savings of approximately `44,000 crore (0.61×71,400).

There are huge opportunities to improve the efficiency of fertilizer use. A 10% increase in urea use efficiency results in savings of 2.45 million tonnes (24.5 x 0.1). By taking a subsidy of `71,400/- on each ton, it will result in savings of around `17,500 crore (0.245×71,400).

In total, savings of `136,500 crore (75,000 + 44,000 + 17,500) are possible. But to achieve this, the government will need to enact far-reaching reforms in pricing and subsidies.

The government should stop channeling subsidies through manufacturers; instead, it can be granted as a direct benefit transfer (DBT) only to small and marginal farmers. All suppliers should be free to sell fertilizers at market-determined prices. The import of urea should be liberalized even if the import of non-urea fertilizers is already free.

This will ensure competition between suppliers and the survival of the fittest, i.e. those who can supply at the lowest cost. In the absence of subsidized fertilizer in the market (since the subsidy goes to the farmer’s account), diversion will be completely eliminated. Moreover, since the MRP reflects the true cost of fertilizers, farmers will use them efficiently.

The government must also review taxes and duties. It makes no sense to impose a tax on fertilizers only to be reimbursed as an additional subsidy. Customs duties on all fertilizer imports and the RMs used in their manufacture should disappear. The gas should be subject to GST and placed under a five percent slab.

(The author is a policy analyst.)