 "Freeing up fertiliser creates a policy conundrum")
As Rabi sowing began, fertiliser dealers in Hissar, Haryana, would open their shops only under police protection. This was to prevent a free-for-all as farmers scrambled for bags of scarce urea. Elsewhere, dealers sold stocks of this heavily subsidised fertiliser only to ration-card holders. In other places, urea was available on the black market at a steep 33 per cent premium.
This severe shortage of urea, which accounts for 55-60 per cent of a farmer's fertiliser consumption, occurred even as it continued to be smuggled into Nepal, Pakistan and Bangladesh by the truckload.
Come the Budget on February 28 and the industry and agricultural economists are hoping bizarre situations like this will not recur with Finance Minister Arun Jaitley announcing price decontrol and starting the process of transferring subsidy payments directly to farmers' accounts.
There's been a buzz about this in the corridors of power in recent months but is it possible? Given the many hurdles, the reckoning within government and the industry-farmer complex is that total decontrol is at least three years away.
"The government cannot abolish the fertiliser subsidy overnight because there are many preconditions, but the Budget should give some signals in that direction," says Ashok Gulati, Infosys Professor for Agriculture at the Indian Council for Research on International Economic Relations. For their part, industry officials say though they are all for decontrol, the process needs to be transparent.
At the heart of the problem
The decontrol of urea prices has long been strongly resisted by the powerful farm lobby. Yet, with the subsidy arrears expected to burgeon to about Rs 40,000 crore this fiscal, the bulk of it on urea, thoughts on these lines had been doing the rounds even under the previous United Progressive Alliance. It took a tentative step towards decontrol when it introduced the Nutrient-Based Subsidy (NBS) scheme for P and K fertilisers in 2010.
Under NBS, companies were paid a specific subsidy per unit based on the nutrient content of the product, leaving them free to determine market prices. The assumption was that paying manufacturers a per-unit subsidy instead of on the old cost-plus basis would encourage them to control costs, and competition would limit the market price the farmer paid.
Urea prices, however, continued to be administered and the subsidy paid on a cost-plus basis (raising all the old accusations of "gold-plating" by the industry). The retail price of urea fixed for the 2014-15 season is Rs 5,360 a tonne against an actual cost of production of about Rs 20,000 a tonne. The Centre, thus, bears around 75 per cent of urea production costs compared to about 30 per cent for P and K.
The problems begin here. First, the government is expected to reimburse fertiliser companies within 25 days of the production of bills. But companies say they were last reimbursed in August. "The government has almost run out of its Budget allocation and no subsidy is being paid now," confirms a senior industry official. The subsidy currently outstanding is about Rs 27,000 crore and is expected to climb to Rs 40,000 crore by March-end. Sources in the government say this is likely to be rolled over to the next fiscal year in the Budget.
As a result of the heavy subsidy on urea, the gap between it and P and K prices is wide - against urea's MRP of Rs 5,360 a tonne, diammonium phosphate is Rs 22,000 to Rs 24,000 a tonne and muriate of potash is Rs 16,000 a tonne (for both P and K, rupee depreciation has raised the cost of imported inputs).
This wide price differential has exacerbated a long-standing problem of a nutrient imbalance that eventually makes the soil less responsive to fertiliser. A paper presented at a Fertiliser Association of India seminar showed that the NPK ratio was 10:4:1 in 2011-2012 against an ideal 4:2:1. Since then, say industry officials, it has grown worse (although government officials say this imbalance is restricted to six states, and the overall situation is not so dire).
There is recognition, however, that although decontrol would help the industry, it needs to be done in phases to cushion the impact on the small and marginal farmers who account for 80 per cent of the farming community. This group will need continued subsidy support but the discussion now centres on delivery mechanisms. A high-powered committee recently constituted to suggest ways to reform the Food Corporation of India says farmers should be given a direct cash subsidy of around Rs 7,000 per hectare after which the fertiliser sector can be deregulated.
Direct subsidy, however, could be fraught with problems. The biggest is identifying beneficiaries, for which coherent land records - India has about 140 million hectares of net sown area - are needed and land records are considered the weakest link in the chain.
Even assuming this process is accelerated, it may not help tenant-farmers who account for about a fifth of Indian farmers. "Should the government decide to go for cash transfers, millions of tenants will be denied their portion of the fertiliser subsidy because their names aren't registered in land records or they don't own bank accounts," says Ajay Vir Jakhar, chairman of the Bharat Krishak Samaj. If subsidy payments are delayed, as they have been to industry, resource-poor farmers will be forced to resort to expensive credit, he adds.
Fertiliser policy may be a contentious issue between manufacturers and the government but there is one subject on which they appear to be in concord: urea coated with neem oil. “This can be a game changer for everyone,” says a senior industry executive. Some see it as a way of alleviating the urea subsidy since manufacturers can charge a 5 per cent premium on this product. Also, the government relaxed restrictions a month ago so urea manufacturers can earmark 100 per cent of their production for this product from 35 per cent earlier.
Neem-coated urea is considered superior for several reasons. In conventional urea, about 50 per cent of applied nitrogen is not assimilated by plants. This means a considerable amount of nitrogen leeches into the soil, causing extensive groundwater contamination. But neem’s anti-bacterial properties enable a sustained release of nitrogen, which has the effect of improving the nitrogen use efficiency by 9 or 10 per cent. The use of neem-coated urea has seen rice yields jump 9.6 per cent and wheat by 6.9 per cent, according to recent research.
Industry sources say there are many spin-offs. For one, a 10 per cent jump in urea efficiency means the government could potentially save about Rs 1,500 per tonne on subsidy (it pays manufacturers a subsidy of roughly Rs 15,000 a tonne). Two, because of the heavy subsidy, some urea is diverted to the chemical industry — especially, it is said, in Punjab. Urea is also currently used as an adulterant in milk. Neem-coated urea will deter such diversions, manufacturers say. Senior government officials aver that the product won’t change the broad dynamics of the industry but given the tough choices involved in total decontrol, it is the best available “imperfect choice” for the time being.
Different voices
Not all economists advocate the per-hectare subsidy delivery. "A fixed per-hectare subsidy could have an adverse impact not only on the growers, but also the companies," says Ramesh Chand, director of National Centre for Agricultural Economics and Policy Research. He adds that this method would not guarantee that the farmer will buy fertiliser from that subsidy. Instead, the subsidy should be given on a per-bag basis and paid into his account just as it is done for bottled cooking gas.
To reduce the shortfall in the immediate future, some suggest freeing urea imports just as the government has done for P and K. Currently, urea imports are canalised through three government agencies, STC, MMTC and Indian Potash. India imports a little under a quarter of its total urea requirement of 33 million tonnes, most of it from China. It is this near-monopsony that caused the shortage this Rabi season because the three importers delayed procurement.
Whatever the method, there is an urgent need to reform the urea sector if new investments are to come up and reduce the country's dependence on imports. A Planning Commission estimate shows that in order to increase urea capacity by about 12 million tonnes, India will need to invest at least Rs 40,000 crore at current capital cost. But, the total investment in the fertiliser sector by the end of 2010-11 was just Rs 27,247 crore. The previous UPA government had notified a New Investment Policy for the urea sector in September 2008 based on the recommendations of a committee headed by former Planning Commission member Abhijit Sen. "Though, the policy somewhat helped in increasing the urea production capacity, it failed to attract any new investment in the sector due to uncertainty in availability and pricing of gas," a report by a Working Group of the Planning Commission on the 12th Five-Year Plan (2012-13 to 2016-17) says. A new policy has been proposed but the problem of gas pricing remains.
Gas is the principal feedstock for urea units, accounting for 75 to 80 per cent of raw material cost and each plant gets gas at different prices; some of it from government allocation at an administered price, some of it from imports (LNG), for which prices have more than doubled. An industry official says fertiliser units were assured 31.5 million cubic feet (mmcf) but received about 27 mmcf - the shortfall was made up by imports so the blended gas price has gone up. The broad recommendation is for a pooled gas price, which sources say is likely to happen and would remove a major hurdle for the industry. But that amounts to half a step in the long battle to decontrol fertiliser pricing.
HERBAL HELP?
Fertiliser policy may be a contentious issue between manufacturers and the government but there is one subject on which they appear to be in concord: urea coated with neem oil. "This can be a game changer for everyone," says a senior industry executive. Some see it as a way of alleviating the urea subsidy since manufacturers can charge a 5 per cent premium on this product. Also, the government relaxed restrictions a month ago so urea manufacturers can earmark 100 per cent of their production for this product from 35 per cent earlier.
Neem-coated urea is considered superior for several reasons. In conventional urea, about 50 per cent of applied nitrogen is not assimilated by plants. This means a considerable amount of nitrogen leeches into the soil, causing extensive groundwater contamination. But neem's anti-bacterial properties enable a sustained release of nitrogen, which has the effect of improving the nitrogen use efficiency by 9 or 10 per cent. The use of neem-coated urea has seen rice yields jump 9.6 per cent and wheat by 6.9 per cent, according to recent research.
Industry sources say there are many spin-offs. For one, a 10 per cent jump in urea efficiency means the government could potentially save about Rs 1,500 per tonne on subsidy (it pays manufacturers a subsidy of roughly Rs 15,000 a tonne). Two, because of the heavy subsidy, some urea is diverted to the chemical industry - especially, it is said, in Punjab. Urea is also currently used as an adulterant in milk. Neem-coated urea will deter such diversions, manufacturers say. Senior government officials aver that the product won't change the broad dynamics of the industry but given the tough choices involved in total decontrol, it is the best available "imperfect choice" for the time being.
This severe shortage of urea, which accounts for 55-60 per cent of a farmer's fertiliser consumption, occurred even as it continued to be smuggled into Nepal, Pakistan and Bangladesh by the truckload.
Come the Budget on February 28 and the industry and agricultural economists are hoping bizarre situations like this will not recur with Finance Minister Arun Jaitley announcing price decontrol and starting the process of transferring subsidy payments directly to farmers' accounts.
There's been a buzz about this in the corridors of power in recent months but is it possible? Given the many hurdles, the reckoning within government and the industry-farmer complex is that total decontrol is at least three years away.
"The government cannot abolish the fertiliser subsidy overnight because there are many preconditions, but the Budget should give some signals in that direction," says Ashok Gulati, Infosys Professor for Agriculture at the Indian Council for Research on International Economic Relations. For their part, industry officials say though they are all for decontrol, the process needs to be transparent.
At the heart of the problem
The decontrol of urea prices has long been strongly resisted by the powerful farm lobby. Yet, with the subsidy arrears expected to burgeon to about Rs 40,000 crore this fiscal, the bulk of it on urea, thoughts on these lines had been doing the rounds even under the previous United Progressive Alliance. It took a tentative step towards decontrol when it introduced the Nutrient-Based Subsidy (NBS) scheme for P and K fertilisers in 2010.
Under NBS, companies were paid a specific subsidy per unit based on the nutrient content of the product, leaving them free to determine market prices. The assumption was that paying manufacturers a per-unit subsidy instead of on the old cost-plus basis would encourage them to control costs, and competition would limit the market price the farmer paid.
Urea prices, however, continued to be administered and the subsidy paid on a cost-plus basis (raising all the old accusations of "gold-plating" by the industry). The retail price of urea fixed for the 2014-15 season is Rs 5,360 a tonne against an actual cost of production of about Rs 20,000 a tonne. The Centre, thus, bears around 75 per cent of urea production costs compared to about 30 per cent for P and K.
The problems begin here. First, the government is expected to reimburse fertiliser companies within 25 days of the production of bills. But companies say they were last reimbursed in August. "The government has almost run out of its Budget allocation and no subsidy is being paid now," confirms a senior industry official. The subsidy currently outstanding is about Rs 27,000 crore and is expected to climb to Rs 40,000 crore by March-end. Sources in the government say this is likely to be rolled over to the next fiscal year in the Budget.
As a result of the heavy subsidy on urea, the gap between it and P and K prices is wide - against urea's MRP of Rs 5,360 a tonne, diammonium phosphate is Rs 22,000 to Rs 24,000 a tonne and muriate of potash is Rs 16,000 a tonne (for both P and K, rupee depreciation has raised the cost of imported inputs).
This wide price differential has exacerbated a long-standing problem of a nutrient imbalance that eventually makes the soil less responsive to fertiliser. A paper presented at a Fertiliser Association of India seminar showed that the NPK ratio was 10:4:1 in 2011-2012 against an ideal 4:2:1. Since then, say industry officials, it has grown worse (although government officials say this imbalance is restricted to six states, and the overall situation is not so dire).
There is recognition, however, that although decontrol would help the industry, it needs to be done in phases to cushion the impact on the small and marginal farmers who account for 80 per cent of the farming community. This group will need continued subsidy support but the discussion now centres on delivery mechanisms. A high-powered committee recently constituted to suggest ways to reform the Food Corporation of India says farmers should be given a direct cash subsidy of around Rs 7,000 per hectare after which the fertiliser sector can be deregulated.
Direct subsidy, however, could be fraught with problems. The biggest is identifying beneficiaries, for which coherent land records - India has about 140 million hectares of net sown area - are needed and land records are considered the weakest link in the chain.
Even assuming this process is accelerated, it may not help tenant-farmers who account for about a fifth of Indian farmers. "Should the government decide to go for cash transfers, millions of tenants will be denied their portion of the fertiliser subsidy because their names aren't registered in land records or they don't own bank accounts," says Ajay Vir Jakhar, chairman of the Bharat Krishak Samaj. If subsidy payments are delayed, as they have been to industry, resource-poor farmers will be forced to resort to expensive credit, he adds.
| HERBAL HELP? |
| |
Neem-coated urea is considered superior for several reasons. In conventional urea, about 50 per cent of applied nitrogen is not assimilated by plants. This means a considerable amount of nitrogen leeches into the soil, causing extensive groundwater contamination. But neem’s anti-bacterial properties enable a sustained release of nitrogen, which has the effect of improving the nitrogen use efficiency by 9 or 10 per cent. The use of neem-coated urea has seen rice yields jump 9.6 per cent and wheat by 6.9 per cent, according to recent research.
Industry sources say there are many spin-offs. For one, a 10 per cent jump in urea efficiency means the government could potentially save about Rs 1,500 per tonne on subsidy (it pays manufacturers a subsidy of roughly Rs 15,000 a tonne). Two, because of the heavy subsidy, some urea is diverted to the chemical industry — especially, it is said, in Punjab. Urea is also currently used as an adulterant in milk. Neem-coated urea will deter such diversions, manufacturers say. Senior government officials aver that the product won’t change the broad dynamics of the industry but given the tough choices involved in total decontrol, it is the best available “imperfect choice” for the time being.
Different voices
Not all economists advocate the per-hectare subsidy delivery. "A fixed per-hectare subsidy could have an adverse impact not only on the growers, but also the companies," says Ramesh Chand, director of National Centre for Agricultural Economics and Policy Research. He adds that this method would not guarantee that the farmer will buy fertiliser from that subsidy. Instead, the subsidy should be given on a per-bag basis and paid into his account just as it is done for bottled cooking gas.
To reduce the shortfall in the immediate future, some suggest freeing urea imports just as the government has done for P and K. Currently, urea imports are canalised through three government agencies, STC, MMTC and Indian Potash. India imports a little under a quarter of its total urea requirement of 33 million tonnes, most of it from China. It is this near-monopsony that caused the shortage this Rabi season because the three importers delayed procurement.
Whatever the method, there is an urgent need to reform the urea sector if new investments are to come up and reduce the country's dependence on imports. A Planning Commission estimate shows that in order to increase urea capacity by about 12 million tonnes, India will need to invest at least Rs 40,000 crore at current capital cost. But, the total investment in the fertiliser sector by the end of 2010-11 was just Rs 27,247 crore. The previous UPA government had notified a New Investment Policy for the urea sector in September 2008 based on the recommendations of a committee headed by former Planning Commission member Abhijit Sen. "Though, the policy somewhat helped in increasing the urea production capacity, it failed to attract any new investment in the sector due to uncertainty in availability and pricing of gas," a report by a Working Group of the Planning Commission on the 12th Five-Year Plan (2012-13 to 2016-17) says. A new policy has been proposed but the problem of gas pricing remains.
Gas is the principal feedstock for urea units, accounting for 75 to 80 per cent of raw material cost and each plant gets gas at different prices; some of it from government allocation at an administered price, some of it from imports (LNG), for which prices have more than doubled. An industry official says fertiliser units were assured 31.5 million cubic feet (mmcf) but received about 27 mmcf - the shortfall was made up by imports so the blended gas price has gone up. The broad recommendation is for a pooled gas price, which sources say is likely to happen and would remove a major hurdle for the industry. But that amounts to half a step in the long battle to decontrol fertiliser pricing.
HERBAL HELP?
Fertiliser policy may be a contentious issue between manufacturers and the government but there is one subject on which they appear to be in concord: urea coated with neem oil. "This can be a game changer for everyone," says a senior industry executive. Some see it as a way of alleviating the urea subsidy since manufacturers can charge a 5 per cent premium on this product. Also, the government relaxed restrictions a month ago so urea manufacturers can earmark 100 per cent of their production for this product from 35 per cent earlier.
Neem-coated urea is considered superior for several reasons. In conventional urea, about 50 per cent of applied nitrogen is not assimilated by plants. This means a considerable amount of nitrogen leeches into the soil, causing extensive groundwater contamination. But neem's anti-bacterial properties enable a sustained release of nitrogen, which has the effect of improving the nitrogen use efficiency by 9 or 10 per cent. The use of neem-coated urea has seen rice yields jump 9.6 per cent and wheat by 6.9 per cent, according to recent research.
Industry sources say there are many spin-offs. For one, a 10 per cent jump in urea efficiency means the government could potentially save about Rs 1,500 per tonne on subsidy (it pays manufacturers a subsidy of roughly Rs 15,000 a tonne). Two, because of the heavy subsidy, some urea is diverted to the chemical industry - especially, it is said, in Punjab. Urea is also currently used as an adulterant in milk. Neem-coated urea will deter such diversions, manufacturers say. Senior government officials aver that the product won't change the broad dynamics of the industry but given the tough choices involved in total decontrol, it is the best available "imperfect choice" for the time being.