Issue of fertilizer subsidy in India – Explained, Pointwise

Introduction

The subsidy allows an individual to buy a product or use a service at a lower price than its market cost. The government in India has been providing a host of price subsidies on kerosene, cooking gas, water, electricity, fertilizer, etc. in order to support the vulnerable sections.

The farmers have been getting the benefits of fertilizer subsidies since the era of the Green revolution. It has become a core component of providing input support to the agricultural sector.

Recently, the government has announced an increase of 140% in the subsidy amount of DAP (Diammonium phosphate) fertilizer. It is expected to provide a sigh of relief to the farming community who is already facing severe pandemic stress. They have lost their loved ones and are battling the double jeopardy of rising healthcare bills and reduced urban remittances. This move would bring temporary relief to the sector but a permanent solution warrants long term reforms to make the agriculture sector more lucrative.

Current Scenario

• Recently, a committee headed by PM took a decision to increase the subsidy on DAP (Diammonium phosphate) fertilizer. The subsidy was increased by 140% from Rs 500 per bag to Rs 1200 per bag.
• Till last year, the actual price of DAP was 1700. The farmers were getting one bag for 1200 and a 500 rupee subsidy was given to companies. 
  • However, now the actual price of DAP is 2400 as international prices of phosphoric acid, ammonia etc. used in DAP have increased. Therefore in order to prevent companies from selling DAP at 1900 rupees, the government enhanced the subsidy.
• The Department of Fertilizers has further notified a higher per-kg NBS (Nutrient Based Subsidy) rate for P. It increased to Rs 45.323/kg while the earlier rate was Rs 14.888/kg.

About DAP

• It is the second most commonly used fertilizer in India. It has sales of 119.13 lakh tonnes (lt) in 2020-21 next only to the urea. Furthermore, it is applied just before or at the time of sowing by the farmers. 
• The fertilizer is high in phosphorus (P) that stimulates root establishment and development. It contains 46% P and 18% nitrogen (N). Without DAP, the plants cannot grow to their normal size or will take too long to mature.
• It is similar to urea and muriate of potash (MOP), which again have very high N and potassium (K) content of 46% and 60%, respectively.

Fertilizer Subsidy in India

• Under the subsidy regime, farmers buy fertilizers at Maximum Retail Prices (MRP). However, this MRP is below the normal supply-and-demand-based market rates or what it costs to produce/import them.
• While, the MRP for urea is controlled/fixed by the government, it is decontrolled for other fertilizers including DAP, MOP, etc.
  • The maximum retail price (MRP) of urea is currently fixed at Rs 5,378 per tonne or Rs 242 for a 45-kg bag. Since companies have to sell at this controlled rate (fixed MRP), the subsidy is variable. It means subsidy depends upon the market price or costing of Urea. Government has to pay the difference between controlled price and market price.
  • In other fertilizers, the government only gives a fixed per-tonne subsidy. This means the subsidy is fixed, while the MRPs are variable. Thus, MRP of Decontrolled fertilizers is way above urea MRP and attract lower subsidy. For some of the non-urea fertilizers, government launched nutrient-based subsidy or NBS scheme. 

Nutrient Based Subsidy(NBS) regime for Non-Urea fertilizers

• Under this, a fixed amount of subsidy is calculated for each fertilizer based on its nutrient composition. The government decides the rates for nutrients like Nitrogen (N), Phosphorous (P), Potassium (K), Sulphur (S), etc. which then are used for calculating a flat per ton rate.
• It means subsidy will be different for the fertilisers having different proportions of NPK. It means one tonne of DAP which contains 460 kg of P and 180 kg of N will get more subsidy compared to 10:26:26’ NPK fertiliser due to the difference in nutrient compositions.
• It allows the manufacturers, marketers, and importers to fix the MRP of the Phosphatic and Potassic (P&K) fertilizers at reasonable levels.
• The domestic and international cost of P&K fertilizers is considered along with the country’s inventory levels and the currency exchange rate in order to decide the MRP. 

Need for increasing the fertilizer subsidy on DAP

• Cushioning the farmers from Price rise: The rise in subsidy would protect the farmers from the price rise. The fertilizer companies have enhanced the MRP of DAP from 1200 to 1900 as international prices of phosphoric acid, ammonia, etc. raw materials have increased.
  • They would still pay 1200 rupees per bag despite the fact that the international prices of phosphoric acid, ammonia, etc. used in DAP have gone up by 60% to 70%.
• Boost Production: DAP is a crucial fertilizer for growing cotton and soybean in the western and northern regions of India. With sufficient subsidy, the farmers would be able to grow more produce in the Kharif season.
• Tackle the Covid impact: The farmers are undergoing severe stress due to the challenges posed to them by the Covid-19 pandemic. This includes loss of urban remittances, the rising cost of healthcare, and death of bread earners in the family. The increased subsidy would provide some relief to them.
• Political Considerations: Some experts are also viewing the rise in subsidies as a move to prevent the resurgence of the farmer’s protest amid the second wave of Covid 19. 

Steps to taken by Government to prevent fertilizer overuse

• Compulsory neem-coating of all urea from December 2015.
• Making fertilizer subsidy payment to companies conditional upon actual sales to farmers being registered on point-of-sale machines from 2018. Under this, a valid sale requires a biometric authentication aadhar card or kisan credit card number.
• There is an upcoming plan to cap the total number of subsidised fertilizer bags that any person can purchase during an entire cropping season.

Issues associated with fertilizer subsidy

• No Denial Policy: Currently anybody can purchase any quantity of fertilizers through the PoS machines. There is a limit of 100 bags per transaction, but no limit is placed on the number of transactions. This enhances the diversion of fertilizers towards unintended beneficiaries.
  • For instance, urea’s super subsidized and multiple usage nature makes it highly prone to diversion.
  • It can be used as a binder by plywood/particle board makers, cheap protein source by animal feed manufacturers or adulterant by milk vendors. Further, it is also smuggled to Nepal and Bangladesh.
• Environment Degradation: The subsidies have enabled the over utilisation of fertilizers on agricultural lands. This is especially true for the super cheap urea which has witnessed a minor price rise since the last decade.
  • The bulk of urea applied to the soil is lost as NH3 (Ammonia) and Nitrogen Oxide due to poor Nitrogen use efficiency of Indian Soils. This leads to contamination of groundwater, soil, land, etc. 
• Economic Costs: The Central Government spends about Rs 80,000 crore on subsidies for chemical fertilizers every year. With the increase in subsidy in DAP, the government will spend an additional Rs 14,775 crore as subsidy in Kharif season.
• Health impacts: Over use of fertilizers also pollutes groundwater. Infants who drink water with high levels of nitrate (or eat foods made with nitrate-contaminated water) may develop the blue baby syndrome.
  • It refers to a number of conditions that affect oxygen transportation in the blood, resulting in the blueness of the skin in babies.

Suggestions

• First, the government should consider alternative ways for helping the farmers like the use of Direct Benefit transfer instead of subsidies. This would curb its diversion for non-agricultural use and reduce the number of fraudulent beneficiaries.
  • Until then, there should be a cap on the total number of subsidised fertilizer bags that any person can buy during an entire kharif or rabi cropping season. 
• Second, urea should be included under the NBS scheme in order to reduce the fiscal burden of fertilizer subsidy on the government. This was recommended by the Sharad Pawar Committee in 2012.
• Third, the focus should now be placed on discouraging the use of chemical fertilizers and encouraging the adoption of organic fertilizers like vermicompost, seaweed extracts, etc. This would be in line with sustainable development and prevent land degradation.
• Fourth, in the long run, the government needs to augment the agricultural income of farmers so that they voluntarily give up their subsidies in the future. This would happen with better implementation of schemes like E-NAM, SAMPADA, PM Fasal Bima Yojana, etc.

Conclusion

The subsidies are like a dole to the farmer, it is saving his body but destroying its spirit. The ultimate solution is to make agriculture more lucrative and remunerative which would gradually lead to the withdrawal of subsidies and relieve the government of their fiscal burden.