Events & Issues

New Delhi, 17 August 2009

Farmers & Fertilizers

DIRECT SUBSIDY, BETTER YIELD?

By Dr PK Vasudeva

The Government’s move to unshackle the fertilizer industry is a great idea. The sooner we throw the sector open the better. But, we must tread carefully as there is no guarantee that merely by freeing the industry dramatic changes in availability and prices in favour of farmers would result.

Farmers are increasingly using chemical fertilizers for better output of their produce. However, they are not getting direct subsidy from the Government as it goes to the fertilizer industry. Therefore, the mode of delivering the fertilizer subsidy must rightly shift from the producer to the farmer, who is the intended beneficiary.

None of the stakeholders — neither the farmer, who is the product user nor the industry the producer or the Government that doles out the subsidy — ever appeared happy with the extant controls and restrictions. The country, regrettably is not self-reliant in chemical fertilizers.

Among major fertilizers, the critical bottleneck in the production of urea is the limited availability of natural gas/LNG. DAP (Di-Ammonium Phosphate) production depends on availability of imported raw material/intermediates such as rock phosphates, phosphoric acid, sulphur, etc. Owing to limited availability and fluctuating prices of raw materials/intermediates in the international market, production of DAP and complex fertilizers has thus remained stagnant.

The consumption of fertilizers during the 9^th Five Year Plan and the initial years of the 10^th Five Year Plan has been stagnant. However, a combination of a good monsoon, increase in cultivated area, improved awareness about usage of fertilizers and better purchasing power in rural areas has resulted in a sharp increase in consumption of fertilizers, especially since 2004-05.

Despite improving availability and expanding usage of chemical fertilizers, per hectare consumption in nutrient terms is around 115 kg only, far less than that of many other developing countries. For instance, China consumes close to 300 kg/ha. While rising consumption is a positive sign, the productivity response has been rather muted. Well, around 70 per cent of the total fertilizer consumption in the country is on foodgrain crops and most of it is in irrigated areas.

In other words, there is a skew in fertilizer consumption, with wide variation across States and regions. It is also known that high-input regions of Punjab, Haryana and Uttar Pradesh have become environmentally fragile. Besides, soil health has deteriorated and the water table has declined to alarming levels. Urgent steps to arrest the deterioration are needed. Crop diversification is a must. The politically expedient policy-driven system of grain mono cropping needs to be broken, and use of organic sources (bio-fertilizers) and the like to restore soil health is warranted.

Importantly, in his Budget speech, Finance Minister Pranab Mukherjee referred to the Government’s intention to shift to a system of direct transfer of subsidy to the farmers. However, he did not specify a timeline. Clearly, fertilizer subsidy is something the Government will need to live with. The focus must, therefore, shift to the farmer. Currently, for chemical fertilizers, the farmer spends on an average just about Rs 1,500 per hectare, although the cost of production is calculated to be several times higher. The difference is absorbed as subsidy.

Besides, fertilizer subsidy has been ballooning in recent years. It reached an unprecedented and wholly unsustainable Rs 99,500 crore in 2008-09, up from Rs 43,300 crore in 2007-08 and Rs 28,000 crore in 2006-07. A sharp rise in international prices since 2006-07 and unchanged domestic prices account for a substantial portion of the subsidy.

The Rs 99,500 crore fertilizer subsidy Bill for 2008-09, translates to over Rs 5,000 crore per hectare of cultivated land. Yet, on ground there is little to show in terms of output growth. Though fertilizers are one of the key inputs for agriculture, the industry is quite happy keeping it instead.

The Government is on record that as per rough estimate, the total removal of plant nutrients (NPK) by foodgrain crops is around 32 million tonnes (mt) at the present level of foodgrain production of 230 mt. The replenishment of nutrients (NPK) through addition of chemical fertilizers is nearly 16 mt assuming 70 per cent of 23 mt of fertilizer nutrients is consumed by foodgrain crops.

About 6 mt of nutrients may be added through manures, leaving a total nutrient gap of 10 mt. This gap has to be met from bio-fertilizers and other nutrient sources. Besides, the imbalanced use of chemical fertilizers (significantly different from the desirable ratio of 4:2:1) and low addition of organic matter over the years has caused widespread multi-nutrient deficiencies and deterioration of soil health. The deficiencies of sulphur, zinc and boron are said to be more widespread.

Clearly, soil conditions, crop type and agronomy should dictate the amount and nature of fertilizers to be applied. In the event, soil-test based site-specific integrated nutrient management is necessary. Therefore, it calls for conjunctive use of inorganic and organic sources of plant nutrients (compost, bio-fertilizers).

The maximum retail price of chemical fertilizers has remained unchanged since February 2002 though the actual cost of production is said to be roughly 4-5 times higher. At the current subsidised MRP, the cost of 115 kg of fertiliser applied on an average per hectare works out to approximately Rs 1,400 -1,500.

The gross area under cultivation of major crops is an estimated 165 million hectares. Here is a simple calculation. Assuming the Government delivers directly to farmers the fertilizer subsidy at the rate of, say, Rs 4,000 a hectare, it would involve an outgo of Rs 66,000 crore; and at Rs 5,000 a hectare, the outgo would be Rs 82,500 crore.

Such direct payment would allow farmers the freedom to access the most suitable fertilizer. It would also free the industry from unnecessary restrictions and foster competition. This idea is in no way intended to be the last word, but something that would trigger a debate on how best to support farmers with direct subsidy even while allowing the industry the freedom to operate and innovate.

A simplified solution to the vexed issue of fertilizer pricing and delivery of subsidy would be to grant to the farmer a direct subsidy at a fixed rate per hectare of land cultivated. The gross area under major crops is 165 million hectares. If the farmer is granted Rs 5,000 as subsidy per hectare, the total subsidy burden would be Rs 82,500 crore and at Rs 4,000 a hectare, it would be Rs 66,000 crore. The subsidy amount can be delivered to farmers directly. Administrative hassles will be minimised, if not eliminated. This, however, pre-supposes the farmers know what they need and are in a position to source it.

(Copyright, India News and Feature Alliance)