Urea dilemma in Madhya Pradesh: Shortage at farms, stockpiles at companies

Supplies to farmers in Madhya Pradesh accounted for just half the requirement of 400,000 bags of urea this November, even as mounting inventories incurred losses for companies

On Sunday, hundreds of farmers from Khategaon village in Madhya Pradesh’s Dewas district laid siege to National Highway-59, demanding adequate supply of urea, whose shortage has once again become an issue in several parts of the state just when the peak wheat sowing period is on.

Sources said against a requirement of 400,000 bags of urea in November, actual supplies were just 200,000 bags (one bag weighs 45 kilograms), a shortfall of 50 per cent. The reasons are many.

“In the black market, urea is available at Rs 350-400 a bag, while the government price is Rs 260. This is purely due to mismanagement and the negative impact of the flawed loan waiver scheme of the MP government,” said Bhagwan Meena, a young farmer activist from the state and founder member of Rashtriya Kisan Mazdoor Mahasangh.

He added that the flawed implementation of the much-talked-about loan waiver scheme had compelled many farmers to default on their loan accounts maintained with the primary agriculture cooperative societies (PACS).

“Due to the default, they have become ineligible for fresh fertilisers and seeds from these societies.So they are forced to rely on the open market for urea,” Meena explained. The state government, on its part has blamed the Centre for the artificial shortage of urea in the state. It also claims that the demand grew suddenly because wheat sowing got bunched up on account of extended monsoon, also causing a spurt in acreage. 

Companies, on the other hand say there is no shortage, and instead complain that they are sitting on huge inventories, which is causing them losses as production has increased.

As on October 30, internal documents show that India had around 7.4 million tonnes of urea in stocks, of which around 3.4 million tonnes were at the retailer level and 1.7 million tonnes at the level of the wholesaler.

Around 840,000 tonnes were in transit during the period. “Shortage is more at the local level as distribution of fertilisers within the state is the responsibility of the state governments,” a senior company executive said.

Between the high demand for urea in Madhya Pradesh, which has led to the current shortage, and bulging stocks with retailers, perhaps lie the woes of India's fertiliser sector which, despite best efforts, have stubbornly persisted for years.

UREA POINT

Urea is the most consumed fertiliser in India, whose growing use has put the complex soil matrixat risk. The big reason for this is that it is cheaper than other fertilisers, namely, is DAP and MOP and NPK.

From 4.7:2.3:1 in 2010-10, the Nitrogen, Phosphorus and Potassium (NPK) ratio has worsened to 6.6:2.6:1 in 2018-19.

While, urea prices are highly subsidised and kept artificially low, DAP, MOP and NPK prices are market controlled, though a there is a very small semblance of subsidy is here too.

Due to excessive use of urea, the effectiveness of fertilisers on crops has also declined. This is a major reason why India’s per-hectare yield of many crops is below global standards.

Data shows that the crop response ratio of fertiliser (measured as kilograms of grain produced for every kilogram of NPK applied) has fallen sharply over the decades from 12.1 in 1960-65 to just 5 in 2010-11.

In other words, excessive use of urea is gradually making crops unresponsive. Worse, It is also impacting the environment.

Correcting the price distortion in urea vis-à-vis other plant nutrient is one of the key measures to correct this distortion, because all others, such as soil health cards and neem coating of urea, selling them in small-sized bags, haven’t yielded desired results.

SOIL HEALTH CARDS

The scheme of issuing unique cards to farmers, using which they can get the nutrients in their fields diagnosed and get advice on remedial measures, had been in the pipeline for years. But, it was under the Narendra Modi government that the scheme took off in a big way, after it was allocated an additional budget and states were roped in.

But, a recent survey by global consulting firm MicroSave showed that almost 75 per cent of farmers were not even aware of the Soil Health Card scheme. More importantly, among the surveyed farmers only 7.5 per cent possessed the cards.

The Central Government’s own website shows that so over 100 million health cards have been distributed in the first phase to farmers and over 110 million in the second, after updating.

Between 2014-15 and 2016-17, the Centre released over Rs 222 crore to states for the scheme.

Of the 11,289 farmers that MicroSave surveyed for NITI Aayog between July and October 2018 across India, 15 per cent were tenant farmers and 1,182 retailers.

The evaluation was the fourth in a series of surveys done by MicroSave for the government and the first pan-India study done by them.

Another yet-to-be-completed study by two assistant professors from Indraprasta Institute of Information Technology, (IIIT)-Delhi, namely Kiriti Kanjilal and Gaurav Arora, showed that the information contained in the SHCs only accounts for costs and returns from cropping.

“We conjecture that the information contained in SHCs could be enhanced if it were to also account for farmer behaviour,” the researchers said.

Clearly, a lot of work needs to be done in order to SHCs viable and important for farmers.

DIRECT BENEFIT TRANSFER (DBT)

Direct benefit transfer in fertilisers was touted as a major reform that could take care of several issues for farmers, the fertiliser industry and the government.

The DBT model adopted in fertilisers was different from one in LPG, as the farmer got to cash into his bank account for the difference between market price and subsidy rates.

Instead, DBT in fertilizer is at best an identification tool, where each time a farmer buys a bag of fertilizer from the retailer, he is asked to put his aadhar number and finger print in the Point-Of-Sale (PoS) machine.

As soon as the farmer details get verified on the PoS machine, the information would be passed on to the company and within seven days the subsidy would have been released into the company’s bank account.

The system was designed to have three benefits.

First, it was meant to check diversion and cap leakages for the government. Secondly, it would smoothen subsidy disbursal for companies and release their working capital. Thirdly, it was meant to be an efficient tool for farmers as it saved them the hassle of standing in long queues.

However, the first benefit is yet to be fully realised and the second and third have not been fulfilled.

The fertiliser industry says the subsidy isn’t released within a week due to budget constraints.

In fact, it has become staggered. Earlier subsidy was released every quarter, but now it is bunched up and is delayed beyond six months.

Earlier, the subsidy was released by the Central Government as soon as the fertilisers arrived in the district, but it now gets triggered only after farmer has bought the bag from the retailer.

“This delay has increased working capital requirement and interest cost,” a senior Fertilizer Association of India (FAI) official said.

For the farmers, the MicroSave survey showed that during peak fertiliser sale season, almost 60 per cent of the retailers faced issues in managing their sales effectively, because of which they sold the fertiliser manually or in cash and adjusted the transactions in the Point of Sale (PoS) machines much later.

“The current DBT process in fertilisers does not fully address the problem of leakages, as there was no check on the number of bags that each farmer can purchase,” said Mitul Thapliyal, Partner and Leader—Government and Social Impact of MicroSave Consulting.

The survey showed that as of 2018, just around 13 per cent of the total transactions done in fertiliser retail shops were without aadhar. The figure was around 60 per cent during MicroSave's first round of survey in 2016 in just two districts of Andhra Pradesh.

It clearly meant that though Aadhar authentication has improved in fertiliser sales, the process hasn’t been made foolproof and on an average, farmers spent 4-5 minutes to complete one transaction.

INDUSTRY WOES

The fertiliser industry has long been complaining that the high cost of production and rising subdisy dues, along with unchanged reimbursement of fixed cost for urea have been the main factors that have shackled the industry.

The fixed cost for urea is reimbursed on 2002-03 cost data, and though there has been steep increase in cost elements after that, the data hasn’t been revised. Due of this, the cumulative impact on the industry is underpayment to the extent of Rs 5,600 crore in the past five years.

India’s annual production of urea is around 24 million tonnes, while the consumption is around 32-33 million tonnes. This means that India is net importer of urea.

However, some experts say because of faulty policy steps, urea produced in India is costlier than imported urea.

A recent article in the Financial Express said that the average cost of production for all domestic urea capacity stands at $332.2/metric tonne, while global urea price was around $300 per tonne.

And, only seven of the 30 urea plants were producing the fertiliser at a cost lower than their global peers, while in 2014-15, when the global price was $287/metric tonne, 17 Indian plants were operating at costs below $300/metric tonne.

“This means, over the last four years, the cost of production has increased significantly for Indian urea production,” the article said.

It identified the pooled gas policy for domestic urea manufacturing as the main reason for rising production cost as low share of local gas from 76 per cent in 2012-13 to 30 per cent in first quarter of 2019-20 means that high raw material cost is making domestic urea production costly for manufacturers.

But, FAI representatives said that even today domestic urea makers are supplying at much lower prices -- cheaper than imports.

“So instead of the government spending over Rs 40,000 crore in reviving five closed public-sector plants which would make India self-sufficient in urea, it should focus on restoring the health of the existing plants,” FAI said.

NON-UREA FERTILSERS

For non-urea fertilisers such as DAP, MOP and NPK, the story is ever worse. There is an inverted tax structure applied to the raw materials needed for DAP, MOP and NPK, namely phosphoric acid, ammonia, rock phosphate and sulphur. The customs duty on phosphoric acid and ammonia is 5 per cent, which is same as finished fertilizers, while the customs duty on rock phosphate and suplhur is 2.5 per cent.

"Import duties on raw materials and intermediaries increases their domestic cost of production, making them uncompetitive compared to imports,” an FAI official said. With the subsidy rate remaining the same for domestic and imported P&K fertilisers, local players don’t have any added incentive to manufacture them.

Due to this, the capacity utlisation of domestic phosphatic fertilizers has been declining from 70 per cent in 2010-11 to 65 per cent in 2018-19. In the last five years, there has been a marginal capacity addition of just 500,000 tonnes in this sector as most players prefer importing to adding domestic capacities.

BULGING SUBSIDY

Due to improper implementation of DBT in fertilisers and government’s poor financial health, the subsidy burden of the fertiliser sector has remained elevated and every year around Rs 39,000-40,000 crore remains unpaid to the companies and gets carried over the next year.

This year, till November 1, around Rs 33,6911 crore subsidy dues are pending from the government for fertiliser companies. Out of this, Rs 20,853 crore is under DBT, while the rest is non-DBT-related.

Clearly, the fertiliser sector in India needs a fresh approach and thinking. One possible solution is direct cash transfer using the PM-KISAN platform into the bank account of farmers, bypassing the current process of routing the subsidy through companies. But, this too has its own pitfalls and might not find favour with farmers, because as the Microsave Survey showed, almost 64 per cent of farmers surveyed didn’t prefer cash transfers due to increased financial burden on them.

As almost 93.5 per cent of them purchased fertiliser in cash, the survey found that they would have to incur an upfront expenditure of over Rs 900 for a 45-kilogram bag of urea, up from Rs 260 a bag if prices are decontrolled and subsidy incurred is directly transferred into their banks accounts.

“DBT in cash for fertilisers is a good idea but it should be given some time before it is rolled out and only after the present DBT format settles down. Any undue haste might have a big impact,” Thapliyal of MicroSave Consulting said. 

TABLE 1: Carryforward Fertilizer Subsidy Dues
Year	Amount (Rs cr)
2015-16	43,356.23
2016-17	39,057.11
2017-18	32,053.21
2018-19	39,053.21
2019-20*	60,000.00
*Till November 1, 2019. Estimated by year end; Source: Fertiliser Association of India (FAI)

TABLE 2: Trend in response to NPK (kg grain/kg NPK)
Year	Response
1960-69	12.1
1970-79	10.7
1980-89	9.1
1990-99	8.8
2000-09	6.8
2010-17	5.0
Source: FAI