On Fertiliser Price Control Regime – Price of price distortion

Source: This post on Fertiliser Price Control Regime has been created based on the article “Express View on government and non-urea fertilisers: Price of price distortion” published in “Indian Express” on 31^st January 2024.

UPSC Syllabus Topic: GS Paper 3 Agriculture – Issues related to direct and indirect farm subsidies.

News: The article discusses the recent decision of the government to cap the profit margins companies can earn from sales of non-urea fertilisers.

Background:

The current cost monitoring and price control regime in urea is being extended to all other subsidized fertilizers.

This is a result of the government’s decision to cap the profit margins companies can earn from sales of non-urea fertilisers. The MRP of these fertilisers cannot be more than 8-12% higher than their total cost of sales.

While urea is a controlled fertiliser, DAP, MOP and complexes (with varying nitrogen, phosphorus, potash and sulphur content) will also cease to be “decontrolled” fertilisers.

What are Controlled and Decontrolled fertilisers?

Controlled fertiliser: Urea is the only fertilizer with statutorily controlled price & movement. The Department of Fertilizers provides an indicative MRP at which they are to be sold. The Government pays the difference between the controlled price and market price to the fertiliser company.

Decontrolled fertilisers: The MRPs of non-urea fertilisers (such as DAP, MOP) are decontrolled and are fixed by the companies in the open market. The Centre, however, pays a fixed per-tonne subsidy on these nutrients to ensure they are priced at “reasonable levels”.

Why has this decision been taken?

Benefits to Farmers: The government’s argument is that the benefit of fertiliser subsidy should also accrue to farmers.

Prevent Unreasonable Profiteering: Any unreasonable profit (more than 8-12%), will have to be foregone by fertiliser companies.

What are the issues?

It takes the fertiliser industry back to the full-control era before the introduction of the nutrient-based subsidy (NBS) system in 2010.

As seen in the case of Urea’s exclusion from NBS – its fixed MRP led to over-application, worsening nutrient imbalance and declining crop yield response.

What should be done according to the author?

1) Not regulating MRPs of fertilisers.

2) Encouraging balanced nutrient use.

3) Developing fertiliser products customised to different crop and soil-type requirements.

4) Fertiliser subsidy can be converted into a direct income support scheme on a per-farmer or per-hectare basis.

Question for practice:

What are the issues with the recent decision of the government to cap the profit margins companies can earn from sales of non-urea fertilisers? What steps should be taken to resolve issues with fertiliser subsidies?