Perception vs reality

BAD SUBSIDIES : The only way to remove fertiliser subsidy is through direct benefit transfer in place of routing subsidy through the industry.

Perception vs reality
Addressing a global business summit recently, Prime Minister Narendra Modi for the first time, shared at length his thinking on subsidies. He said, “We have to eliminate bad subsidies, whether or not they are called subsidies. But, some subsidies may be necessary to protect the poor and the needy and give them a fair chance to succeed. Hence, my aim is not to eliminate subsidies but to rationalise and target them.”

He continued: “I am referring to cooking gas, fertiliser and kerosene subsidies. I must confess that I am surprised by the way words are used by the experts on this matter. When a benefit is given to farmers or to the poor, experts and government officers normally call it a subsidy. However, I find that if a benefit is given to industry or commerce, it is usually called an "incentive" or a "subvention". We must ask ourselves whether this difference in language also reflects a difference in our attitude?  Why is it that subsidies going to the well-off are portrayed in a positive manner?”  

“Yet, these are rarely referred to by those who seek reduction of subsidies. Perhaps these are seen as incentives for investment. I wonder whether, if the fertiliser subsidy is re-named as "incentive for agricultural production", some experts will view it differently.”
In the context of fertilisers that has been under persistent attack by all and sundry, Modi may only be partially right. Just because subsidies by their very nomenclature are perceived to be bad, in this sector, a number of adverse policies were implemented during the last two-and-a-half decades or so, without even analysing the causes behind the increase in subsidy and assessing their consequences.

These included sudden decontrol of phosphate (P) and potash (K) fertilisers in 1992; continued control on maximum retail price (MRP) of urea at low level; progressive tightening of pricing norms under administered pricing scheme for urea – called retention pricing scheme (RPS) until 2003 and new pricing scheme (NPS) thereafter and too much of control and micro-management of P&K fertiliser manufacturers under nutrient based scheme (NBS) in vogue since 2010.

These policy changes did not help in making a dent on fertiliser subsidy which continues to rise (it increased from mere Rs 4,800 crores in 1991-92 to Rs 73,000 crores in 2015-16) and yet these have affected the health and growth of this industry. No fresh investment has been made during the past close to two decades. These have seriously hampered the ability of manufacturers to survive, forget making reasonable return on investment.

In this backdrop, if fertiliser subsidy is re-named as ‘incentive for agricultural production’, that might help avoid adverse policy re-orientations. But, there is something more to the mess in fertilisers than just the nomenclature. Under extant dispensation of routing subsidy through manufacturers, there are blatant misuses of subsidy that cannot be brushed aside. So, what are the misuses?

First, due to control on MRP of urea at a ridiculously low level, there is a strong incentive to divert the subsidised urea for industrial use or smuggle to neighbouring countries where prices are much higher due to absence of subsidy support. According to an estimate, about 30 per cent of urea meant for agriculture is pilfered. This translates to a loss of about Rs 15,000 crore annually to the exchequer.

True, neem coating of urea (under an order issued last year, all of urea has to be ‘mandatorily’ coated with neem) can help check diversion by making it unsuitable for use in chemical industries. But, given the huge differential between the subsidised price and full cost based/market price, dubious players will find some way to circumvent the order. Moreover, it is not easy to police 600 million bags sold annually. Pilferage will persist as long as the price differential remains.

Impact on the environment

Second, low urea MRP juxtaposed with much higher price of P&K fertilisers (for example, DAP sells at over four times the price of urea; courtesy much lower subsidy on the former) is leading to serious imbalance in fertiliser use and affecting use efficiency. Only one third of applied nitrogen (N) is picked up by plants even as one-third seeps in to water and remaining one-third evaporates. Imbalance in NPK use ratio is also leading to deterioration in soil health, lower crop yield and adverse impact on the environment.

Third, the existing system shields high cost urea manufacturing units even as efficient and low cost units have no incentive for their better performance. This together with delayed payment of subsidy dues (at present, these stand at a whopping Rs 45,000 crore) erodes margins of even good performers and they have no interest in expanding capacity. Resulting increase in high cost urea imports leads to ballooning subsidy.

Fourth, an over-arching impression that all increases in cost will be reimbursed as additional subsidy by the government under NPS/NBS [though fertiliser manufacturers actually do not get it often or get only partial compensation] makes the suppliers of inputs/raw materials tendentious to increase prices.

In P&K where dependence on import is 90 and 100 per cent respectively, global cartel of exporters charge exorbitant prices fuelled by the system of reimbursing manufacturers here as subsidy. This was also true for gas import until recently when a 25 year long-term supply agreement with RasGas/Qatar was re-worked to bring down price to align with prevailing international price.   

Such misuses cannot be condoned simply by re-christening subsidy as “incentive”. The only way to get rid of these is by introducing direct benefit transfer (DBT) in place of extant system of routing subsidy through the industry. Already, DBT has achieved wonders in LPG and the government is launching in kerosene from April 2016. Modi must not delay its launch in fertilisers which will also be consistent with his much adumbrated philosophy of rationalising and targeting subsidy only to the poor. 

(The writer is a policy analyst)

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