Monday, March 22, 2010

Nutrient-based fertilizer subsidy regime

In the Union Budget 2010-11, the Government signalled its desire to shrink subsidies to 1.5% of GDP in 2011-12, and to 1.3% in 2012-13, from 2.1% of GDP (Rs 1.31 trillion) in 2009-10 and Rs 1.16 Cr estimated for 2010-11. The 13th Finance Commission had recommended that the level of food, fertilizer and petroleum subsidies, which together account for at least 90% of the government’s subsidy bill, be brought down to a combined 0.88% of GDP by 2014-15.

Fertilizer subsidies are arguably the most politically sensitive and form the second largest share of subsidies after food. It is also entrapped in the most powerful vested interests of farmers and fertilizer industry lobby. Any meaningful revamp of the existing product-based fertilizer subsidy regime will always be a touchstone for the commitment of any Central Government in India towards genuine fiscal reforms.

In a landmark move aimed at reforming the fertilizer subsidy regime, the Union Budget 2010-11 had announced the decision to move away from product-based towards a nutrient-based subsidy (NBS) regime for fertilizers (especially phosphatic and potassic fertilisers) from April, 1, 2010. It was also decided to mark-up the maximum retail prices (MRPs) of urea by 10% (from Rs 4,830 per tonne to Rs 5,310 starting 1 April) and decontrol the prices of non-urea fertilizers.

However, distribution and movement controls (not price controls) under the Essential Commodities Act, 1955 would remain on up to 20% of the production and import of these products to ensure adequate supplies in under-served areas. While the Centre would be able to direct companies where and how much to sell in respect of this 20%, the remaining 80% can be freely sold by the industry anywhere at market prices determined based on the demand-supply forces.

The proposed NBS regime would be directly applicable only to 18 non-urea fertilisers already covered with product-based subsidy - di-ammonium phosphate (DAP), mono ammonium phosphate, triple super phosphate, single super phosphate (SSP), muriate of potash (MoP), ammonium sulphate and 12 grades of complex fertilisers. In these 18 fertilisers, the subsidy would be given based on their respective Nitrogen (N), Phosphorus (P), Potassium (K), and Sulphur (S) contents and the unit subsidy for them would be decided on an annual basis by the Department of Fertilisers as per the recommendations of an Inter-Ministerial Committee consisting of the Secretary (Fertilisers) and representatives from the Department of Agriculture & Cooperation, Department of Agricultural Research and Education, Department of Expenditure and Planning Commission. Further, any variant of the above fertilisers containing secondary and micro nutrients such as calcium, zinc, boron or molybdenum will attract a separate per tonne subsidy to encourage their application along with the primary nutrients.

The fertilizers would be sold to farmers at its decontrolled MRP (minus the sbubsidy) and the subsidy amount paid separately to the fertilizer companies. The payment of subsidy to the manufacturers/importers of the 18 fertilisers (barring SSP) shall be based on the receipt of fertilisers in the districts of the States, while being based on sale in the States in case of SSP. The customised fertilisers and the fertiliser mixture industry will be able to receive the subsidised fertilisers from the manufacturers/importers after its receipt in the districts as inputs for manufacturing customised fertilisers/fertiliser mixture.

Accordingly, the government have announced that the subsidy on N would be fixed at Rs 23.22 a kg, for P at Rs 26.27, for K at Rs 24.48, and for S at Rs 1.78 from April, 1, 2010. Therefore the subsidy on DAP (containing 18% N and 46% P) would stand at Rs 16,263.8 a tonne, on MoP (containing 60% K) would be Rs 14,688 a tonne. The current controlled retail price of DAP is Rs 9,350 a tonne, while it is Rs 4,455 a tonne for MoP. The unit subsidies fixed for the four nutrients would be applicable for the whole of 2010-11 and have been arrived at by benchmarking to international prices that were taken at $500 a tonne for DAP, $370 a tonne for MoP, $310 a tonne for urea and $190 a tonne for sulphur.

These subsidies have been fixed keeping in mind the prevailing market prices, medium-term expectations, reasonable returns for producers, and small inevitable price increases (Rs 500-600 per tonne for DAP) during the crop season. The current controlled MRP of DAP is Rs 9,350 a tonne and the landed cost of imported DAP is now around $515 a tonne or Rs 23,432 a tonne at current exchange rates. If the subsidy element is added, the industry could realise Rs 25,613.8 a tonne without increasing the MRP. Similarly, the current controlled MRP of MoP is Rs 4,455 a tonne and the landed cost of imported MoP (from Canada) is $370 a tonne. With this, the realisation to the industry after adding subsidy to the existing controlled MRP would be a comfortable Rs 19,143 a tonne or $420 a tonne. Except unforeseen increases in global fuel prices, any possible volatility in fertilizer prices therefore appears remote.

The move is expected to facilitate balanced fertilisation through new fortified products and promote extension services by the fertiliser industry, besides increasing productivity and returns for the farmer. Further, once a nutrient-based subsidy is in place, makers of phosphatic and complex fertiliser may gain at least limited flexibility in pricing products based on individual cost structures. Producers can now introduce many more variants of fertilizers, and will no longer need to stick to DAP or other specific complex fertilisers, due to the product-subsidy element on each. Though the normal ratio for N:P:K in the soil is 4:2:1, this has been greatly skewed due to the distortions in the old subsidy regime. Urea contributes at least 50% of fertilizer consumption of around 50 million tonnes in the country.

The diversity in product mix will also enable greater differentiation between producers and they could customise products to crops and regions without jostling each other within the same commoditised markets. Further, while subsidy per tonne of nutrient may be uniform across producers and based on input costs, a few may be able to price their products lower if they enjoy lower overheads.

The Government will keep the nutrient-based fertiliser prices for transition year 2010-11 at around the (MRPs) currently prevailing and disburse the subsidy to the fertilizer firms directly. It hopes to dispense off with the dual pricing and move over to a system of direct transfer to the farmers bank account from next year.

Interestingly, the Economic Survey has favored coupons over cash transfers on the grounds that the subsidy would get channelised to the intended use instead of being frittered away on wasteful expenditures (like liquor and gambling). It also advocates structuring these coupons to favour particular nutrients keeping in view soil fertility and health considerations and having different coupons for different nutrients, with the underlying subsidy being varied accordingly.

Update 1 (27/3/2010)
If the new rates of subsidy applicable on different fertilizers from the coming fiscal are compared with their existing levels, in most products, the subsidy payable to fertilizer companies will actually go up.

For DAP, manufacturers and importers who are currently given a concession of Rs 10,245 a tonne in return for selling at a controlled MRP of Rs 9,350 a tonne, will now get a subsidy of Rs 16,268 a tonne (and increase of 59%). The subsidy on MAP has been raised by 104% and on TSP by 38.5%.

1 comment:

Anonymous said...

So what's wrong if DAP, MOP subsidy had gone up? Going by the stats, the prevailing subsidy was a loss to the producers, comparing with the imported price.
Are u sure that the cash transfer system is not linked to purchase of the agri input by the farmer and a smart card?