15 Oct

Fertilizer Subsidy

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Content

• Introduction
• Nutrient Based Subsidy scheme, 2010
• Urea Based Subsidy
• Impact of Fertilizer Subsidy Policies in India

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Introduction

• A fertilizer is any organic or inorganic, natural or synthetic material added to soil to supply one or more plant nutrients essentially to the growth of plants.
• These fertilizers provide six macro nutrients and 8 micro-nutrients to plants for well balanced growth:
  i. 6 macronutrients: nitrogen(N), phosphorus(P), potassium(K), Calcium (Ca), magnesium (Mg), and sulphur(S). They are consumed by plants in larger quantities and make the bulk of fertilizers.
  ii. 8 Micronutrients: Boron (B), Chlorine (Cl), Copper (Cu), iron (Fe), manganese (Mn), Molybdenum(Mo), Zinc (Zn) and Nickel (Ni).
• Fertilizer are an important input for agriculture and have played a major role in increasing farm productivity since green revolution.
• But Indian farmers have often faced difficulties due to shortage of fertilizers in past. To ensure easy availability of fertilizers, government has various subsidy schemes. But not all fertilizers are sold at a controlled price.
• In India, Urea is the only controlled fertilizer, which is sold at statutory notified uniform prize. The Phosphatic and Potash fertilizers are under a decontrolled regime and are sold at indicative maximum retail prices (MRPs).

A) NUTRIENT BASED SUBSIDY (NBS) SCHEME, 2010

Key provisions of NBS

• Fixed subsidy based on nutrient:
  • Government provides a fixed amount of subsidy based on the nutrient content (both macro and micro (boron, zinc etc.)) (per kg) of fertilizers (unlike the earlier product-based subsidy scheme) to the fertilizer companies.
  • For e.g. for RABI 2022 (from 01/10/2022 to 31/03/2023) – Subsidy rate was decided as follows:
    • N (Rs 98.02/kg) P (Rs 66.93/Kg), K (Rs 23.65/Kg) and S (Rs 6.12/kg)
  • MRP to be fixed by fertilizer companies on the basis of demand and supply but after incorporating the subsidy element.
  • Rate of subsidy is determined by various factors such as international prices, exchange rate, inventory levels etc.
  • The NBS scheme currently covers 21 grades of different phosphatic and potassic (P&K) fertilizers including DAP (diammonium phosphate), MOP (Murate of Potash) and other NPK complex fertilizers.
  • UREA has been kept outside the coverage of the NBS scheme.

Key Aim: Reduced Subsidy Burden; New specialized variety of fertilizers; Balanced application; Improved farm output; promote indigenous fertilizer industry.

Hasn’t been as affective -> Government’s subsidy burden still very high -> UREA kept out of NBS, so farmers shifted to UREA -> Balanced Nutrient Goal also missed.
Subsidy burden has also kept on going up.

B) UREA BASED SUBSIDY

Introduction:

•  To ensure affordable access to fertilizers to farmers, UREA is made available at statutorily controlled price, which at present is Rs 5378 per MT (exclusive of Central/State Tax and other charges towards neem coating).
• The difference between the delivered cost of fertilizers at farm gate and MRP payable by farmers is given as subsidy to the fertilizer manufacturer/importer by GoI.

Issue of Diversion

• Being super-subsidized, urea is always prone to diversion for non-agricultural use – as a binder by plywood/particle board makers, cheap protein source for animal feed manufacturers or adulterant by milk vendors – apart from being smuggled to Nepal and Bangladesh.

From 2018, the government announced the implementation of DBT for disbursement of fertilizer subsidy.

Now the subsidy transfer only happens after the actual sales to farmers by retailers. Retailers have a point of sale (PoS) machine linked to e-Urvarak DBT Portal. Fertilizer buyers (farmers) are required to furnish Aadhar or KCC number.
Advantages

• Prevents diversion and plug the leakages (because Aadhar is used)
• Timely payment of Urea subsidy to urea manufacturing companies.
• Adequate availability of UREA to farmers at adequate prices.

But the diversion still continues at the retail level.
Various steps being proposed to deal with this problem:

• Plans for Direct Cash Transfer to Farmers:
  • Ceiling might be put on farmers based on the size of their land.
  • The subsidy may be directly transferred to farmer’s e-wallet which could be made available along with farmer’s Rupay Kisan Card.
• In a study by NITI Aayog in 2019, farmers prefer DBT to fertilizer companies, rather than Direct Cash Transfer to Farmers as they are worried that buying fertilizers at market prize would be an extra burden.
• Government is trying to resolve this concern by developing a DCT mechanism where fertilizer subsidy will be paid in advance.

Plans to cap the total number of subsidized fertilizer bags that any person can buy during an entire Kharif and Rabi Cropping season:

• This is expected to end even retail-level diversion and purchases by large buyers masquerading as farmers.

C) IMPACT OF FERTILIZER SUBSIDY POLICIES IN INDIA

• Positive Impact: Fertilizer subsidy policies have had positive impact in terms of increasing fertilizer consumption and hence leading to an increase in overall Agri-production.
• But it has failed in the goals of increasing domestic production (and has thus increased import dependency) and promoting balanced use of nutrients by farmers. It has also led to diversion of UREA for other industries and exports to neighboring countries.

Why domestic industry couldn’t be promoted:

• Lack of raw material for potassic and phosphatic fertilizers: India completely lacks any
  commercially exploitable source of Potash and the entire demand for MOP is met through import. In the Phosphatic sector (for DAP etc.), there is limited availability of raw material like Sulphur and rock phosphates and hence, a bulk of raw material is imported. Even the Urea sector is dependent on imported fuel sources like crude oil and now, even gas.
• Low investment in fertilizer sector over the years.
• Inefficient Fertilizer manufacturer companies – Since they get subsidy based on the cost of production (rather than fixed subsidy for all manufacturers on the basis of per unit production).

Increased dependency on Urea has been harmful

• In India, the ideal ratio of NPK fertilizers use is considered as 4:2:1. However, in most regions it is skewed against the ratio with a propensity to use larger quantities of N (urea) as it is cheaper.

It has caused serious problems:
i. Widespread deficiency of secondary and micro-nutrients.

• Among these, the deficiency of zinc has to be specifically mentioned as zinc
  deficiency in food causes problems like stunting.

ii. Fertilizer response and efficiency has continuously declined over decades mainly due to
imbalanced use of nutrients.
iii. Environmental damages

• Part of over-used Nitrogen is lost as NH3, N2, NOx gases which adversely affect
  environment.
• Part of Nitrogen leaches down as NO3 and contaminates the ground water
  resources. It has been found to cause methemoglobinemia or the Blue baby
  syndrome.

iv. Limits diversification of crops

•  Specialized fruits, vegetables require special non-UREA fertilizers, which are not
  easily available at affordable prices. This prevents diversification of agriculture.

Diversion of UREA -> smuggling to neighboring Nepal, Diversion to Industries
Huge Fiscal Burden on Government

• A burden of more than Rs 2 Lakh crore only because of fertilizer subsidy.

D) SOME STEPS THAT HAVE BEEN TAKEN TO MAKE UREA SECTOR EFFICIENT

i. GAS Price Pooling

• Earlier, different urea plants got gas at different prices, so their cost of production differed.
• Therefore, in 2015 government has approved a major policy intervention. Under this policy the domestic gas is pooled with imported LNG gas to provide uniform natural gas to all the Urea manufacturing plants for the production of Urea.
• Cost of UREA at pooled price will be less that the price of imported urea. This will
  help in increasing the production. This will augment indigenous production capacity.

ii. Neem Coating of UREA

• Reduces rate of dissolution in soil -> slowly absorbed by plants
• Reduces diversion to industry
• Neem has other advantages for crops -> insecticidal and pesticidal properties
• UREA can’t be used in synthetic milk now

iii. New Urea Policy to increase the productivity, efficiency and indigenous production
iv. Introduction of 45 kg Urea Bag (from earlier 50 kg) -> aimed at cutting demand

v. Nano Urea

• Government has notified the specification of Nano nitrogen under Fertilizer Control Order, 1985.

vi. One Nation One Fertilizer Scheme

• It aims to ensure timely supply of fertilizers as well as eliminate the dilemma of farmers in choosing one of the many brands available in the market.

vii. Pradhan Mantri Krishi Samriddhi Kendra (PMKSK)

• It has been decided to convert the existing village/block/sub-district/taluk and district level fertilizer retail shop into Model Fertilizer Retail Shops. These shops will act as “One Stop Shop” for all the agriculture related inputs and services.

viii. PM PRANAM (Proposed)

• Aimed at reducing the use of chemical fertilizers and thus reducing the subsidy burden.

E) STEPS THAT FURTHER NEEDS TO BE TAKEN/WAY FORWARD

i. Work towards self-reliance and reducing dependency on imports.

• Tie-up with gulf countries to set up plants
  • Gas prices for UREA plants in India is 3 times higher than in gulf countries. So we should set up joint ventures in countries where these prices are low.

ii. Correcting Price Signals and Decontrolling the Fertilizer sector -> More investment and more competition.

• • The Commission on Agriculture costs and Prices (CACP) has recommended the centre to bring urea under NBS regime.

iii. Direct Cash Transfer to Farmers and ensure progressive subsidies.
iv. Improve fertilizer efficiency -> Expand the soil health testing facilities and Issue of soil health cards
v. Digitization of land records

• The process of was launched in 2008 but has not gathered momentum.
• Without setting right the land records, it will be impossible to transfer the subsidy to
  beneficiaries or to issue soil health cards.

vi. Ensuring timely reach of subsidy to farmers

•  Last, but not the least, in the drive for increased efficiency and productivity, we should not forget the question of equity and inclusiveness, for 85% of our operational holdings belong to small and marginal farmers and smaller farmers tend to use fertilizers more intensely.

vii. Develop Alternative sources of nutrition for agriculture – Shift towards non-chemical form of fertilizers -> scope to use large biomass of plants which is wasted today;

Conclusion:
These steps will go a long way in enhancing the productivity of agriculture, mitigating climate change, providing an alternative to chemical fertilizers and balancing the fiscal impact of fertilizer subsidy on the Union Budgets in the years to come.