Calling for sweeping reforms in the fertiliser sector, the Economic Survey today pitched for deregulation of the urea market through payment of fixed subsidy directly to farmers and freeing imports.
The survey also called for setting a cap on the number of subsidised bags each farmer can purchase and biometric authentication at the point of sale to plug leakages.
It pointed out that only 35 per cent, that is about Rs 17,500 crore of the total urea subsidy of Rs 50,300 crore, reaches the intended beneficiaries -- small and marginal farmers.
It suggested a two-point reform package which includes decontrolling urea imports to increase the number of importers, and bringing urea under the nutrient based subsidy regime and paying subsidy directly to farmers.
"Reform of the fertiliser sector would not only help farmers but also improve efficiency in the sector.
"Decimalising imports will ensure timely availability of fertilisers, and universal Direct Benefit Transfer (DBT) to farmers based on biometric identification with physical offtake can reduce diversion of urea," the economic report card for 2015-16 said.
At present, urea is a controlled commodity and government has fixed its selling price at Rs 5,360 per tonne. The difference between its selling price and cost of production is paid as subsidy to manufacturers.
Pursuing the case for implementing direct transfers in fertilisers, the survey said "it will reduce leakages to the black market".
By bringing urea under the Nutrient Based Subsidy program, domestic producers will continue to receive fixed subsidy based on the nutritional content of their fertiliser, while deregulating the market would allow domestic producers to charge market prices.
"This would encourage fertiliser manufactures to be efficient, as they could then earn greater profits by reducing costs and improving urea quality. And this in turn would benefit farmers," the survey said.
As the Centre controls fertiliser supply chain, it is a good sector to pursue JAM (Jan Dhan, Aadhaar, Mobile) for direct transfer of subsidy, it said.
However, relatively low levels of last-mile financial inclusion in much of rural India also suggest that it would be risky to replace subsidised fertiliser with cash due to beneficiaries' weak connection to the banking system.
The survey pointed that the black market effects are aggravated by further regulation.
"...Decimalising urea imports - which would increase the number of importers and allow greater freedom in import decision - would allow fertiliser supply to respond flexibly and quickly to changes in demand," the document said.
Giving a rationale for decontrolling imports, the survey said this step is required as climatic fluctuations are making it much more difficult for governments to forecast agriculture conditions and centrally manage supply.
Blaming the regulations for distortions in urea market,
the survey said these distortions feed upon each other and create an environment that leads to a series of adverse outcomes.
Urea is subsidised only for agricultural uses. Subsidies like this violate the 'one product - one price' principle, it further said.
It also mentioned that subsidised urea suffers from three types of leakages -- the maximum (41 per cent) is diverted to non-agricultural uses and abroad, while 24 per cent each is spent on inefficient urea producers and large, presumably richer, farmers.
The 75 per cent subsidy on agricultural urea creates a large price wedge which feeds a thriving black market diverting urea to industries and possibly across the border to Bangladesh and Nepal, it said.
The government budgeted Rs 73,000 crore, about 0.5 per cent of GDP, on fertiliser subsidies in 2015-16.
Nearly 70 per cent of this amount was allocated to urea, the most commonly used fertiliser, making it the largest subsidy after food.
Since 2014, important reforms have been implemented in the fertiliser sector. These include neem-coating of urea, which has likely reduced the diversion of fertiliser meant for farmers.
