JOIN USBaby steps will not help rein in fertiliser subsidies
Faced with a steep rise in international fertiliser prices caused by the Ukraine war, the Modi government has implemented two cost-cutting policies: (i) the “One Nation, One Fertilizer” (ON, OF) scheme, under which all fertiliser companies will sell all subsidised fertilisers under a single brand “Bharat”; and (ii) hiring an aggregator like GAIL India Limited to procure the fuel on their behalf or buying from gas exchanges and incentivizing companies
The Centre controls the maximum retail price (MRP) of urea at a low level unrelated to the cost of production, which is higher. The excess of cost over the MRP is reimbursed to the manufacturer as a subsidy, which varies from unit to unit depending on its cost. The movement and distribution of urea are also controlled under the Fertilizer (Movement) Control Order, 1973. The cost of transportation from the plant/port up to the retailer is reimbursed under a uniform freight policy.
For non-urea fertilisers, the government fixes “uniform” subsidies on a per-nutrient basis for all manufacturers and importers. They must deduct the subsidy amount from the cost when fixing the MRP. Although they are free to move and distribute these fertilisers, 20 per cent of the material is under control to serve underserved areas. They get reimbursement for freight costs for movement by rail.
The Department of Fertilisers (DoF) prepares an agreed-upon supply plan to meet the requirement as assessed by the Department of Agriculture and Cooperation (DoAC). Since 2003, though 50 per cent of the indigenously produced urea was deregulated, DoF continues to draw the supply plan for the entire quantity even as the states allocate all of the urea arrivals and track disbursal up to the district level.
The movement and distribution of all fertilisers are monitored through the web-based Fertilizer Monitoring System (FMS).
The government intends to use the ON/OF scheme “to reduce the criss-cross movement of fertilisers that will eventually help reduce freight subsidies and make quality fertiliser available at a lower cost.” This is erroneous.
When the government decides who will supply urea (or any other fertilizer), how much quantity, and where, in consultation with all stakeholders, including manufacturers, and the movement is tracked in real time, it is reasonable to expect crisscross movement.
It is hard to fathom how asking all suppliers to sell fertiliser under one brand will help eliminate criss-cross movement, if any. Simultaneously, by making individual company brands obsolete, it will penalise firms that have invested heavily in building brands in a territory that could face a free for all.
The idea of a uniform pan-India brand may have been prompted by the fact that fertiliser products have fixed nutrient content as specified under the Fertiliser Control Order (FCO); for instance, urea has 46 per cent ‘N’. However, this is a well-known fact; it does not negate the fact that a brand attests to the quality of the product and the entire package of support services provided by the company.
As for the second initiative, since 2015, the Centre has been running a system of pooling natural gas (NG) to supply all urea plants connected to a national grid at a uniform delivered price.
Even as individual units pay as per their respective weighted average delivered cost (taking into account supply from different sources and the applicable price), the pool operator, viz. GAIL India Limited, notifies the “uniform” delivered price (UDP) at the beginning of every month. A unit that pays less than UDP has to deposit the differential amount with the pool, whereas another unit that pays more than UDP gets the difference from the pool.
Under the scheme, the ability of a urea manufacturer to purchase gas at a lower price is not rewarded, just as there is no disincentive for others who buy at a higher price. Pooling ensures that all units end up paying the same price on a delivered basis. In this backdrop, any talk of “incentivising companies that contract fuel at better prices” is laughable.
The idea of an aggregator procuring the fuel on behalf of Indian fertiliser producers is appealing as the consolidation of demand enhances the negotiating power with global suppliers. But, then, GAIL India Limited, in coordination with the DoF, is already doing this by assessing the deficit in supply from existing sources vis-à-vis the projected demand (as compiled by the DoF) and making arrangements for the purchase of LNG to plug it.
Buying NG from gas exchanges won’t help. This is because the quantity traded at the exchange is miniscule.
To conclude, baby steps won’t help make a dent in fertiliser subsidies. To accomplish this, the government should pursue major reforms such as urea decontrol and direct benefit transfer of subsidies, which can force suppliers to cut costs, stop leakages, and farmers to improve fertiliser efficiency.
(The writer is a policy analyst.)