<b>Kanika Datta:</b> If the fertiliser subsidy were abolished...

Doing so is politically tough for any government but there are sensible policy choices to streamline it

Subsidies in general and the fertiliser subsidy in particular have been points of contention since 1991. Fertiliser accounts for a little less than a third of the government's expenditure on subsidy and has been the second-highest of the three major subsidies, food and fuel being the other two.

In a perfect scenario, slashing it altogether could save the finance minister over Rs 1 lakh crore a year. How? The Budget estimate for the fertiliser subsidy for 2015-16 is Rs 72,970 crore. To this could be added the arrears to the industry, which have been a fixture for the past few years, of Rs 38,000 crore to Rs 40,000 crore, plus the subsidy on prices of gas, a major feedstock for urea.

But can the fertiliser subsidy be phased out, just as the government has done with fuel? The reality is more complicated. Two attempts 12 years apart and by two political regimes to raise prices of urea, the principal fertiliser farmers use, show the challenge governments face when it comes to trimming this subsidy.

The first, under Manmohan Singh as finance minister in a Congress-led coalition, was part of the "reform" budget of July 1991. Singh raised the prices of all fertilisers - urea, phosphatic (diammonium phosphate or DAP being the most common form) or potassic (Muriate of Potash or MOP) - a steep 40 per cent. Later, protests led by then Agriculture Minister Balram Jakhar, forced the government to roll back the urea price rise by 10 per cent.

The conundrum for governments perpetually struggling with the fiscal deficit meant that the issue did not go away. In 2003, a New Pricing Scheme was implemented almost in toto but with one crucial exception: the proposal to raise urea prices by seven per cent each year over a five-year period followed by total decontrol was never implemented. Jaswant Singh, finance minister in the Bharatiya Janata Party-led government, had proposed a modest price rise of Rs 12 for a 50 kg bag of urea and about five per cent for the other two fertilisers. This, too, was scrapped following objections from the Opposition.

Further attempts at reform have been neutralised by the political impasse around the price of urea, commonly denoted as N. In April 2010, the government introduced a nutrient-based subsidy scheme, which was linked to the nutrient content of the product, leaving manufacturers to fix the market price. Again, urea was kept out of the purview of this reform.

The result is that urea prices have lagged phosphatic (or P) and potassic (K) by significant margins. Thus, the price of urea for the 2013-14 and 2015-16 seasons was fixed at Rs 5,360 a tonne. For DAP, the price is between Rs 24,000 and Rs 25,000 a tonne and for MOP between Rs 15,000 and Rs 17,000 a tonne.

The irony of this skewed pricing, in which the government subsidises 75 to 80 per cent of the cost of urea production, is that it has deterred fresh investment in a sector that was once self-sufficient and has created a shortage that has forced the government to import.

As Ashok Gulati and Pritha Banerjee of Indian Council for Research on International Economic Relations point out in their paper "Rationalising Fertiliser Subsidy in India: Key Issues and Policy Options" (August 2015), India already meets its entire demand for MOP through imports because it lacks exploitable potash reserves. For phosphates most raw materials and intermediaries are imported too. As the world's second-largest consumer of N and P and the fourth-largest consumer of K, India, thus, remains vulnerable to the pricing pressures of suppliers and a steadily weakening rupee.

The other consequence of the price differential between N,P and K has been the skewed usage ratio between the three nutrients from an ideal 4:2:1 to 10:4:1 in 2011-2012, impacting soil health in a lasting manner

In 2015, the government attempted to control the urea subsidy by mandating that manufacturers produce neem-coated urea to a minimum of 75 per cent of their total production, and allowed them to go up to 100 per cent. It also allowed manufacturers to raise prices by five per cent, which could save the government Rs 6,500 crore on the subsidy bill. The fact that this bio-fertiliser can alleviate soil damage from the excessive leaching of nitrogen is important, but so is the fact that there has been no noticeable farmer distress - or protest - at the modest price rise of Rs 14 for a 50 kg bag.

Given that small and marginal farmers, who account for 80 per cent of the farming community, are unlikely to afford a sharp rise in urea prices, the demand within industry and among analysts is to allow manufacturers to charge market-determined prices and switch to a user subsidy regime via a Direct Benefit Transfer (DBT) scheme targeted at small farmers. The opening of Jan-Dhan accounts presents one opportunity. This may not result in the abolition of the fertiliser subsidy but the experience with the cooking gas subsidy via DBT suggests that substantial savings are possible without extreme consequences.

The Long View is an occasional series that analyses different scenarios