The Economic Survey 2015-16 tabled by Finance Minister Arun Jaitley in the Parliament today states that the rationalization and reprioritization of subsidies through better targeting would play a vital role in fiscal consolidation and in targeting expenditure more towards inclusive development.
The total subsidy bill as a proportion of GDP is expected to be below two percent of GDP as per budget estimates for 2015-16. The 1.7 percent decline in majors subsidies was due to a near 44.7 percent decline in petroleum subsidy during April - December 2015 while other major subsidies- Food and Fertilizer-increased by 10.4 percent and 13.7 percent respectably during the period.
Distortions in urea are the result of multiple regulations, which firstly indicates that urea is only subsidized for agricultural uses. Subsidies like this violate what we call the One Product- One Price principle. Black market effects are aggravated by further regulation- canalization.
Secondly, the black market hurts small and marginal farmers more than large farmers since a higher percentage of them are forced to buy urea from the black market.
Thirdly, some of the urea subsidy goes to sustaining inefficient domestic production instead of going to the small farmer.
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The survey also highlighted that decimalizing urea imports, which would increase the number of importers and allow greater freedom in import decision, would allow fertilizer supply to respond flexibly and quickly to changes in demand. This would be timely as climatic fluctuations are making it much more difficult for governments to forecast agriculture conditions and centrally manage supply.
On the contrary, bringing urea under the Nutrient Based Subsidy program currently in place for DAP (Diammonium Phosphate) and MOP (Muriate of Potash) would allow domestic producers to continue receiving fixed subsidies based on the nutritional content of their fertilizer, while deregulating the market would allow domestic producers to charge market prices.
The survey clearly indicates that the case for implementing direct transfers in fertilizers is to reduce leakages to the black market. The government's policy of neem-coating urea is a step in exactly this direction.
The relatively low levels of last-mile financial inclusion in much of rural India also suggest that it would be risky to replace subsidized fertilizer with cash, due to beneficiaries' weak connection to the banking system.
The Economic Survey further states that the fertilizer subsidies are very costly, accounting for about 0.8 percent of GDP. They encourage urea overuse, which damages the soil, undermining rural incomes, agricultural productivity, and thereby economic growth.
Reform of the fertilizer sector would not only help farmers and improve efficiency in the sector. Decimalizing imports will ensure timely availability of fertilizes, and universal Direct Benefit Transfer (DBT) to farmers based on biometric identification with physical off take can reduce diversion of urea.
