The real reason for rewarding MRP control is at an artificially low level. Skeptical players have a great incentive to divert and take moolah
As part of the 100-day Modi 3.0 agenda, the Government aims to manage fertilizer subsidies more effectively and reduce leakages and diversions to build on the success of neem-coated urea. It aims to conduct trials in several regions on a modified version of Direct benefit transfer (DBT) that seeks to establish linkages between farmer land holdings and nutrient use. A proposal in this regard that was raised in 2020 is being raised. To make urea – a widely used fertilizer that provides primary nutrient nitrogen or ‘N’ and accounts for almost half of India’s total fertilizer consumption – affordable to farmers, the Union Government is regulating its maximum retail price (MRP) at a low level unrelated to cost. of production/import and distribution, much more. The cost in excess of the MRP is reimbursed to the manufacturer/importer as a subsidy which varies from unit to unit depending on its cost. The MRP of urea is kept unchanged (today’s price is almost the same as in 2002) as all costs are increased by increasing the subsidy.
In the case of fertilizers that provide phosphate or ‘P’ and potash or ‘K’ plus another component (call it non-urea fertilizers), there is a ‘uniform’ subsidy on a nutrient basis for all Nutrient Based producers. Subsidy (NBS) Scheme. They are free to adjust the MRP but they need to reduce it till they get the subsidy. Even if subsidies remain constant, rising costs mean MRPs are constantly increasing. The Department of Agriculture and Cooperation (DoAC) – in consultation with the states – assesses the need for fertilizers for each growing season – kharif (April to September) and rabi (October to March).
The Department of Fertilizers (DoF) is preparing an agreed supply plan to cover all urea requirements from domestic production and imports. The states allocate all the urea arrivals and track the payment up to the district level.
DoF has developed a mobile and web application – Fertilizer Monitoring System (m-FMS) which provides information on stock, sale and procurement of fertilizers till the retail end. The total cost of fertilizer subsidy – for both urea and non-urea fertilizers combined – is around Rs 200,000 crore annually. Now, when the Government talks about leakage and diversion, we are reminded of the Economic Survey 2015-16 which said that about 24 percent of the subsidy was used for inefficient producers, 41 percent was used for non-agricultural uses including smuggling. in neighboring countries and 24 percent is consumed by large farmers, who are likely to be wealthy. That leaves a measly 11 percent to small and marginal farmers who make up the majority, which is about 86 percent of the total number of farmers.
At a basic level, leakages are inherent in the way fertilizer subsidy management is structured. The government asks producers to sell fertilizer at a lower price – a price it thinks farmers can afford. After selling at this price, the latter charges an amount equal to the amount above the cost of supplying it as a subsidy. The subsidy would have been given directly to the farmer, by depositing money into his bank account. But, for decades, successive Governments have preferred to deliver it through manufacturers.
Since they have to deal with a few producers instead of thousands of farmers (that would be the case if the subsidy was given directly to them), they have found this program useful. But, there is a big negative to it. Since the subsidy is included in the MRP (or lower), the subsidized fertilizer product must reach the farmer and be used only for growing crops. If it does not reach, the benefit of the grant is enjoyed by the holder.
After leaving the factory or the port (in case of import), the fertilizer travels a long distance by rail/road to reach the storage facilities in the region and on to the retail outlets where it is sold to the farmers.
In the early years of the fertilizer price and subsidy program (introduced in 1977 for urea and 1980 for other fertilizers), producers were given a large portion of the subsidy through ‘exports’ from the factory.
Over time, the Government shifted to releasing 95 per cent of the subsidy to urea producers and 85 per cent to non-urea producers ‘on receipt of goods at the railway station/allowed amount’ (the balance 5 per cent/15 cent paid on guaranteeing farmers’ sales by the states ).
In March 2018, the Government made subsidy payments to producers conditional on actual sales to farmers and this being registered at the point of sale (PoS) machines. But, this alone does not provide a guarantee as diversion can still happen at the retail level especially since anyone – including non-farmers – can buy any amount through PoS machines. All he needs to do is provide his unique ID or Aadhaar number.
Meanwhile, in 2015, the Government issued an order mandating all manufacturers/importers to apply urea to all equipment. The concept was simple. When covered with neem, it is rendered unsuitable for use in chemical industries; hence manufacturers/retailers will have no incentive to divert. However, this will only happen when the coating is finished. That’s where the rub lies. Large-scale policing across the country is almost impossible.
Now, without forbidding non-farmers to buy subsidized fertilizer, the Government wants to consolidate the purchase of fertilizer for the size of the farmer’s land. The purpose of this is to ensure that his purchase corresponds to the amount required for planting the crop only; and that he doesn’t go overboard and make money by selling at a very high price (even though it’s industrial).
Farmers land/yield data will be uploaded on his biometric card. When he goes to the retailer to buy his seasonal requirement, the PoS machine will register the number of fertilizer bags corresponding to the data embedded in the card.
The seller will deliver this number, not what he wants verbally. The view is very attractive. However, activation poses a major challenge.
The government will need to have information – about land holdings, crops grown, soil nutrient status etc for more than 140 million farm households. Apart from ensuring ‘full coverage’, it will need to focus on ‘accuracy’ of data and ‘accuracy’ of calculation as any incorrect calculation or miscalculation may result in shortage or over delivery of bags. In addition, this data should be updated in real time to explain the impact of climate/rainfall changes on fertilizer requirements. Apart from this, the Government lacks tree wood.
The real reason for rewarding MRP control is at an artificially low level. When urea sells for one-tenth the cost of supplying it, unscrupulous players have a greater incentive to divert and extract moolah. They will do everything possible to avoid laws that lead to misuse of grants. The way forward is to deregulate fertilizer prices and provide subsidies ‘directly’ to farmers using the DBT mode.
(The author is a policy analyst; opinions are personal)
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