Not a fertile idea

The stockmarkets can, at times, misinterpret the signals emanating from official documents. Or so it seems from the way the share prices of some fertiliser companies have looked up in the recent past on false hopes.

The comments made in a recent finance ministry paper on government subsidies have been perceived by the markets as a positive signal for the relaxation of controls on the pricing and distribution of fertilisers.

The report said that the subsidy on domestically manufactured fertiliser, in its present form, should be done away with and that urea imports should be decanalised.

As an alternative, the report recommended the introduction of a flat-rate subsidy with two different rates""one for domestic producers and the other for importers""to begin with. This is to be replaced with a single rate subsequently.

This recommendation is neither a worthwhile relaxation of controls nor a judicious policy prescription. Decanalising imports will make little difference as long as imported urea continues to be subsidised.

In any case, very little urea has been imported in the last few years. The flat rate of subsidy disbursal, too, seems to be a modified version of the none-too-successful old group retention price formula.

In fact, a single rate of subsidy for all domestic fertiliser producers, regardless of feedstock, vintage and location, can create more problems than it intends to solve. For, it would introduce disparities in the disbursement of doles even for units using the same feedstock but differing in age, location, and technology.

The real reason for the fertiliser subsidy's prolonged run lies neither in the way it is computed nor the import procedures. Rather, it can be traced directly to the government's inability (read: lack of political will) to raise the retail prices of fertilisers in line with rising prices of hydrocarbon feedstock and other raw materials.

This apart, some of the recent problems regarding subsidy payments have arisen because of the government's underestimation of the likely subsidy burden at the time of budget preparation.

For instance, the budgetary allocation for concessions on indigenous urea for 2003-04 was Rs 7,555 crore against the actual bill of Rs 7,790 crore in the previous year.

Similarly, the current year's Budget has set apart only Rs 12,662 crore for subsidies on all kinds of fertilisers"" which is woefully inadequate. This results in avoidable delays in the payment of subsidy arrears, creating liquidity problems for the industry.

The net result of the uncertainties on the fertiliser front is that no fresh investment is forthcoming in this sector. Worse, both the production and consumption of fertilisers have been stagnant for several years.

This is already being reflected in a deceleration in crop output growth. The best course under the circumstances is to totally decontrol and deregulate the fertiliser sector, leaving market forces to determine prices, production and import of nutrients.

Since doing this abruptly at one go may not be politically advisable, it can be done in well-defined and time-bound phases, giving farmers as well as industry time to adjust to the new realities.