Fertiliser subsidy: Political will missing

IN PERSPECTIVE

In the Union Budget for 2022-23, the Modi government has allocated Rs 1,05,000 crore for fertiliser subsidy, which is Rs 35,000 crore less than the revised estimate (RE) for 2021-22 at Rs 1,40,000 crore.

Fertiliser subsidy arises because the Centre wants manufacturers/imports to sell fertilisers to farmers at a low maximum retail price (MRP), unrelated to the cost of supply, which is much higher. In the case of urea, the difference is reimbursed to the manufacturers as a subsidy on a ‘unit-specific’ basis. In the case of phosphatic and potassic (P&K) fertilisers, it fixes ‘uniform’ subsidy on a per-nutrient basis for all manufacturers and importers.

The three basic factors impacting subsidy are MRP, per unit cost of supply and the quantity of fertiliser use. The reduction in allocation for 2022-23 points towards three possibilities viz. (i) increase in MRP; (ii) reduction in the unit cost of supply; (iii) reduction in the quantity of fertiliser used.

The budget speech talked of setting up an ‘organic farming corridor’ along the banks of River Ganga. It involves the use of natural sources of plant nutrients such as farmyard manure/cow dung, hence, totally free from the use of chemical fertilisers. But, this can’t help in replacing chemical fertilisers on a significant scale. In any case, it won’t be possible in a short span of one year.

As for MRP, considering that the current price of di-ammonium phosphate or DAP (a major phosphate fertiliser) is already high at Rs 24,000 per tonne, it is unlikely that the government will hike it. On the other hand, with the current MRP of urea being ridiculously low at Rs 5,360 per tonne, there is a lot of scope here. A hike of say 200% can yield savings of about Rs 35,000 crore (taking a urea consumption of 33 million tonnes). However, given the past record of literally no increase during the last two decades or so, this is day-dreaming.

Coming to the cost of supply, India is heavily dependent on imports. In the case of P&K fertilisers, nearly 50% of the DAP requirement is imported, whereas muriate of potash (MOP) is entirely imported. Even for their domestic production, all of the raw materials (RMs) viz., phosphoric acid, ammonia needs are imported.

In the case of urea, 1/3rd of its requirement is imported. Even for the balance 2/3rd quantity produced domestically, India depends on imports of natural gas to the extent of 1/3rd.

So, there is little that India can do to lower the cost which is impacted fundamentally by global demand-supply forces. During 2021-22, there was a steep increase in prices of all fertilisers and RMs; the price of DAP more than doubled while the price of urea and MOP went up almost three times each. If the prices remain at an elevated level during 2022-23, then even this route is shut.

With no scope of subsidy reduction, the government will seek more money from Parliament to make up for the under-provision in the budget. It did so during 2021-22 when approval for Rs 60,000 crore was taken in addition to the budget provision of Rs 80,000 crore. It can do the same next year also.

In a way, the Covid-19 pandemic has come as a blessing in disguise. It enabled substantial relaxation in fiscal deficit target: 6.9% of GDP during 2021-22 helping payment of higher fertiliser subsidy. For 2022-23 also, the budget keeps the fiscal deficit at 6.4%, which provides sufficient cushion to fully pay for the bill even if the requirement is the same as last year or even more (very likely in view of the impact of Russia’s invasion of Ukraine on global prices).

What would happen when the government returns to fiscal discipline? Why does it not work on hard options now?

There is rampant misuse/leakage of urea subsidy — estimated to be at least 30%. This is primarily because urea is available at a heavily subsidised price. At the stroke of the pen, it can be eliminated if only the government goes for direct benefit transfer (DBT) of subsidy to farmers even as all manufacturers sell at a market-determined price. This will straightway cut urea demand by 30% or 10 million tonnes; India need not import even a tonne.

Similar outcomes are expected in the P&K segment though to a lesser extent. There will be an indirect gain as well. India being a major importer, a significant cut in its import will reduce the international price, thereby reducing the cost of imports and in turn, subsidy.

Additionally, it will curb excessive use of urea; when the product carries the right price tag, farmers will use it judiciously. It will also be possible to deny subsidies to the undeserving (read large/rich farmers) and target it to poor farmers only.

The gains from this fundamental transformation in the way fertiliser subsidy is administered are huge and sustainable. But its implementation requires strong political will.

Will Modi act?

(The writer is a policy analyst)