Urea imbroglio: Govt must deal with policy flaw

For decades, successive governments have grappled with large-scale diversion, hoarding and black marketing of urea - a widely used fertilizer that constitutes nearly half of India’s total fertilizer consumption. The scale of diversion could be as high as 30%. Taking annual subsidy on urea to be about Rs 50,000–55,000 crore, this would mean that Rs 15,000–16,500 crore of taxpayers’ money is being guzzled by dubious operators.

During the last five years or so, the Narendra Modi government has taken several steps to address it. Let us see how these have fared and assess what needs to be done to make a dent. At the outset, let us capture a few basics about the pricing and subsidy policy.

To make urea affordable to farmers, the Centre controls its maximum retail price (MRP) at a low level unrelated to the costs of production and distribution, which is much higher. The excess cost over MRP is reimbursed to the manufacturer as subsidy which varies from unit to unit depending on its cost of production. The cost of movement from plant to the retailer is reimbursed under a uniform freight policy.

The Department of Agriculture and Cooperation (DoAC) - in consultation with states - assesses the requirement of urea (apart from all other fertilizers) for each cropping season - kharif (April to September) and rabi (October to March). The Department of Fertilizers (DoF) prepares an agreed supply plan to cover all of urea requirement from domestic production and import. The states allocate all of the urea arrivals and track disbursal up to the district level.

Even as production cost has increased in leaps and bounds, the government has kept MRP frozen. The current MRP is ridiculously low at Rs 5,360 per tonne or $71 per tonne.

The average production cost from gas-based plants is more than four times, at about $320 per tonne and the cost of import is about $300 per tonne. This is a tempting scenario for industrial users in India and for farmers in our neighbourhood - Bangladesh, Nepal etc where the price is $250-300 per tonne.

Addressing a rally in 2016, Prime Minister Modi said, “Urea was being sold in the black market and farmers had to bribe officials to get their quota of urea. My government has put an end to the practice of corruption and black market in its sale by distributing neem-coated urea”.

In 2015, the government had issued an order mandating all manufacturers/importers to neem-coat all of the urea supplies. The logic was simple. Upon neem coating, it is rendered unfit for use in chemical industries; hence the manufacturers/dealers will have no incentive to divert. But, this would happen only when coating is done. This is where the rub lies. Policing of a mammoth quantity across the length and breadth of the country is well-nigh impossible.

During 2019-20, urea consumption/sales were about 33 million tonnes - even higher than during 2015-16 at 30 MT. Had coating been done, we would have seen a steep decline!

In March 2018, the government made disbursal of subsidy to manufacturers conditional upon actual sales to farmers and these getting registered on point-of-sale (PoS) machines. Prior to this, they were getting 95% of the subsidy ‘on receipt of material at a district’s railhead point or approved godown’ and balance 5% on confirmation of sales to farmers by states. That arrangement was prone to “wholesale diversion” of urea straight from the railhead/godown.

Proof of sale

Under the new regime, the requirement to give proof of sale to the farmer might have improved the situation. But, this by itself offers no guarantee as diversion can still happen at the retail level all the more because anybody - including non-farmers - can buy any quantity through PoS machines (all that he needs to do is to furnish his unique identity or Aadhaar number). That apart, substantial payment continues to be made under the old dispensation (wherever PoS machines are not available). Hence, diversion is still rampant.

In August this year, the Centre restricted purchase of urea to 100 bags from 999 bags per transaction by one purchaser. Also, it sought states’ opinion on capping the number of such transactions per month. They were also asked to identify top 20 urea purchasers in each of their districts in 22 major fertilizer-consuming states.

To deal with leakages at the retail level, apart from barring non-farmers from purchasing subsidised fertilizers, the government is now planning to impose a ceiling on the number of bags a farmer can buy at the subsidised price for the whole season. The moment a farmer hits this ceiling, the PoS machine will stop registering the extra bags. If the farmer still wants to buy extra, those bags would be available only at the non-subsidised price.

To execute this plan, the government will need to have data – of land holding, crops are grown etc on over 140 million farm households; based on these parameters, how much urea and other fertilizers each will need; record purchase on ‘real-time’ basis; raise the ‘red flag’ when threshold reaches.

This is all bizarre! The most abhorrent idea is ‘purchase of extra at non-subsidised price’.

Is non-subsidised urea available? Which dealer will keep it in his shop? Will there be any takers? Can two streams of urea supply, one at $71 per tonne (subsidised) and the other at $300 per tonne (non-subsidised) co-exist? The government is missing the woods for trees. The diversion has to do fundamentally with flawed pricing and subsidy policy in particular, controlling and freezing urea MRP at an artificially low level.

The way forward is to end control of the MRP of urea, allow manufacturers the freedom to fix retail prices based on the market forces, and remove movement and distribution control. The subsidy should be directly credited to the farmers in their bank account or direct benefit transfer (DBT) as it is known in common parlance. When urea at throwaway price is not available—and thus, there is no arbitrage opportunity—the scope for diversion and black marketing will end too.

(The writer is a New Delhi-based policy analyst)