The Cabinet has approved direct benefit transfer (DBT) of fertiliser subsidy. However, the subsidy will continue to be routed through fertiliser manufacturers. They will receive 100% of the subsidy amount after fertiliser is delivered to the farmer and his identity, namely Aadhaar (and other details such as plot size, crop, nutrient use), is captured on the electronic point of sale (e-PoS) machine.
At present, manufacturers sell urea at the maximum retail price (MRP), which is controlled by the Union government at a low level, and get subsidy reimbursement on unit-specific basis under the new pricing scheme (NPS). On the other hand, manufacturers of non-urea fertilisers are theoretically given 'uniform' subsidy (on per nutrient basis) under the nutrient-based scheme (NBS). However, since payments are adjusted to actual cost data, effectively even subsidy to them is not uniform.
The system of computing costs and subsidy reimbursement to urea manufacturers on unit specific basis gives protection to inefficient and high-cost units even as efficient and low-cost units have no incentive to continue in business. The NPS/NBS gives no incentive to innovate, lower cost and bring better products for the benefit of farmers. Investment and growth of the industry is a casualty.
Besides, the subsidy on urea being substantially higher than the subsidy on non-urea fertilisers, this creates an imbalance in the retail prices, in turn leading to imbalance in NPK (macronutrients nitrogen-phosphorus-potassium) use ratio (there is little that the farmer can do to galvanise fertiliser use as per soil and crop needs, notwithstanding the soil health card given to him), a problem that has assumed gigantic proportions causing irreparable damage to soil health and even the environment.
The system fails miserably with regard to targeting. This is because all fertilisers are available at low price to all farmers irrespective of whether they are rich or poor/small or large. It won't prevent diversion either, as the biggest incentive to divert is its low price. Lured by much higher market prices, traders can divert subsidised fertilisers to chemical factories (neem coating may help to prevent it but it is not a foolproof mechanism) or smuggle out of India.
The government releases 95%(for urea) and 85% (for non-urea fertilisers) of the subsidy on receipt of material in the district and rest 5-15% on authentication of sale by the state. The manufacturers face delays in payment of because of inadequate budget allocation. Further, delay in receipt of confirmation certificates from the states - affecting release of the 5-15% balance - compounds their woes.
The existing system is also incongruous with the Goods and Services Tax (GST), whose objective is to prevent cascading effect of tax on tax by allowing for credit on taxes already paid. The urea MRP being a fraction of the cost, under GST, manufacturers will be left with unabsorbed credit for the tax paid on their inputs. Ditto for non-urea fertilisers, though the problem may be less pronounced as the difference between cost and MRP is very little (courtesy, lower subsidy).
Under DBT, subsidy should go to the bank account of the beneficiary/farmer as is the case with disbursement of LPG subsidy under PAHAL scheme. This means that the government will have to stop routing it through manufacturers, who will sell fertilisers to farmers at full cost/market-based price. This will incentivise efficient/low-cost units to invest and grow even as inefficient/high-cost units will close down. The manufacturers will also have incentive to innovate and come up with diverse products customised to farmers' needs.
Further, since, no subsidised material will be available in the market (as subsidy goes to the bank account of the farmer), there won't be any opportunity for arbitrage; hence no leakage/misuse. Most importantly, the farmer will be able to use the subsidy for buying fertilisers that his soil/crop needs the most. He will be the master of his decisions, instead of a particular use pattern being thrust on him - as is happening under the extant dispensation. There could not be a better way of combating the problem of imbalance in fertiliser use and deteriorating soil health.
Problems to continue
But, this is not what the cabinet has approved. Though branded as DBT, in reality, it is not so, as the government will continue to route subsidy through manufacturers. It will continue to control MRP and retain NPS/NBS. It is a typical case of "old wine in a new bottle". Though the use of Aadhaar might help in curbing misuse somewhat, there is no guarantee that it will be completely eliminated. But, all other problems associated with the existing regime will persist.
The government's argument for not giving subsidy directly to farmers - "he is short of cash and hence cannot afford to pay full cost first and then wait for reimbursement" - is not sustainable. With a robust platform such as JAM (Jan DhanAadhaarMobile), there is no reason why the money cannot be given to him quickly and in advance, if need be.
If it can deliver LPG subsidy to a whopping 165 million beneficiaries under PAHAL and has plans to add 30 million more to the list as also make payments to millions of workers under MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) directly into their bank accounts, it would be nave to argue that this cannot be done for delivering subsidy to 120 million farmers. The challenge is daunting but certainly doable.
While taking a decision on this, the government should be absolutely clear that the full benefits of DBT will accrue only when the subsidy is given directly to farmers and all manufacturers are unshackled from all forms of control - including control on MRP. Otherwise, it will be business as usual.
In any case, with general elections just about a year away and all political parties, including the ruling dispensation, being in election mode, a call on this will have to be taken by the next government perhaps after May 2019.
(The writer is a New Delhi-based policy
analyst)
