Unexpected demand

It is not often that an industry that has lived with, and perhaps thrived on, subsidies from the government puts forth the demand that the subsidy regime be scrapped. This is now the case with the fertiliser industry where the largest player, the Indian Farmers Fertiliser Cooperative (Iffco), is spearheading a campaign for ending the decades-old fertiliser subsidy. If the government wants to help farmers use a key yield-enhancing input like fertiliser, it should give the subsidy directly to them and not route it through the industry, Iffco and others argue. This unexpected demand serves to challenge the common impression that the fertiliser subsidy serves largely to cover the inefficiencies of the domestic fertiliser industry (since the experience in different contexts has been that consumer subsidies often end up being producer subsidies).

Certainly, the subsidy per tonne of fertiliser produced has been high, and served to cover the inefficiencies of many units that opted for small capacities and/or the wrong feedstock. In turn, the government has built on this a superstructure of other pricing distortions for feedstock (gas being underpriced, for instance), and of trade controls. It is also true that, in the past, many fertiliser units pocketed extra subsidy allocations by 'gold-plating' their plants (i.e. building in extra bells and whistles that helped show higher capacity utilisation, since that was one element which determined the quantum of subsidy).

How then does one explain the new demand? First, the loopholes that enabled profiting through gold-plating have mostly been plugged by tightening the pricing norms and re-evaluating plant capacities, and using industry-wise benchmarks for cost. Second, the more efficient fertiliser manufacturers now have the confidence that they can survive and even prosper in an open market situation. And finally, the fertiliser industry as a whole is clearly fed up with the way in which the subsidy programme has worked: it gets a lower price for its produce, as determined by the government, and then waits endlessly (usually, beyond the financial year in question) to receive the promised subsidy. Many units end up facing a severe cash crunch, others find interest costs piling up. It was almost inevitable, therefore, that someone at some stage would say: Enough. That is what Iffco and some others have now done.

Perhaps, the industry also senses that the government's dependence on it is more than its need for government support. The industry is being used as a conduit for reaching the subsidy to farmers, because the government finds this administratively convenient. If there is no subsidy programme, and the industry is allowed to sell at prices discovered by the market, the farm-gate prices of fertiliser would shoot up and force many farmers to reduce fertiliser use. This would not be good for the industry, but the challenge to the government would be even greater because of the economics of farming and the possibility of widespread farmer distress as well as reduced foodgrain production. In theory, the direct payment of subsidy to farmers could be a policy substitute, but this would pose many practical problems. In essence, the administrative machinery that exists today cannot be trusted to deliver a dole of this kind: only a fraction of the money will reach the target beneficiaries. It will also be difficult to compute the subsidy amount for each farmer.

Nevertheless, this does pose a question with regard to other agricultural subsidies, chiefly for electricity and irrigation. A case could be made out for replacing today's subsidy systems and all the pricing and other distortions they introduce, with a consolidated support package for farmers, as is permitted under the World Trade Organisation's norms on the "aggregate measure of support" for agriculture. Such support could be routed through established non-governmental channels like banks, viable cooperative societies, self-help groups and panchayats, and would be based on land holdings, cropping patterns and other relevant criteria. If the administrative machinery could be trusted to do its job, such a scheme would certainly have its merits. The challenge posed by the fertiliser companies provides an opportunity to examine this larger question.