Policy | VOL. 13, ISSUE 80, SEPTEMBER-OCTOBER 2013 |

Fertiliser Pricing and Subsidy Policy in India

Fertiliser is a vital input needed for the enhancement of agricultural production and it played a phenomenal role in the achievement of the green revolution in the country. It has all along been the endeavour of the government to ensure the availability of an adequate quantity of fertiliser at reasonable prices to the farmers across the country over the years. Keeping in view the importance of fertiliser, the Indian government has declared fertiliser as an essential commodity and passed the Fertiliser Control Order (FCO) in 1957—notified to regulate sale, price, and the quality of fertilisers.

Background       

Various committees were constituted from time to time keeping in view the above objectives, whose recommendations had a major influence, in determining the fertiliser pricing policies. Some of the salient ones include the Fertiliser Prices Committee, better known as the Marathe Committee (1977); the Joint Parliamentary Committee on Fertiliser Pricing (1992); the Fertilisers Pricing Policy Review Committee, often referred to as the Hanumantha Rao Committee (1998); Expenditure Reforms Commission (2000); Cost Price Study of Complex Fertilisers (2001); Tariff Commission on DAP and MOP (2003); Cost Price Study of SSP by the Cost Account Branch under the Department of Expenditure (2004); Expert Group on Phosphatic Fertiliser Policy (2005); etc.

The recommendations of the Marathe Committee led to the introduction of Retention Pricing Scheme (RPS) for urea in November 1977, complex fertilisers in February 1979 and for single super phosphate (SSP) in 1982. The implementation of RPS led to a phenomenal increase in fertiliser consumption as well as domestic production of fertilisers. But increase in the cost of production and imports without suitable adjustment in maximum retail price led to significant increase in the subsidy bill. Subsequently, the Joint Parliamentary Committee on Fertiliser Pricing was set up in 1991 to address the issue of rising subsidy bill. The Committee recommended decontrol of price and distribution of the phosphatic and potassic fertilisers along with a marginal 10 per cent reduction in the consumer price of urea. Decontrol of phosphatic and potassic fertilisers led to reduction in the consumption of these fertilisers and nitrogen, phosphorus and potassium (NPK) use ratio was seriously disturbed. NPK use ratio vitiated from 5.9:2.4:1 in 1991-92 to 9.5:3.2:1 in 1992-93 and 9.7:2.9:1 in 1993-94. It took several years to restore the NPK use ratio to the level of 1991-92. The Expenditure Reforms Commission recommended the replacement of unit specific RPS by group based concession scheme in 2000. Most of the other committees too suggested measures to contain subsidy.

Fertiliser industry remained highly controlled despite reforms taking place in other sectors. Cost of inputs was decontrolled resulting in abnormal increase in input prices for the manufacturers. The  industry thus had to devote a lot of time and energy in recovery of its legitimate costs through subsidy rather than involve itself in promotion and extension work. ‘Cost plus approach’ with stringent regulations and procedures did not encourage any investment in the sector since the beginning of the decade of 2000. Capacity of fertilisers remained almost stagnant except small addition through debottlenecking and revamp undertaken in a few plants in recent years. Stagnation in indigenous capacity and production of fertilisers against continued increase in consumption of fertilisers led to high imports at high international prices. High cost of imported raw materials and finished fertilisers and increase in cost of domestic feedstock led to substantial increase in overall fertiliser subsidy bill covering urea, and P and K fertilisers (Fig. 1).

Apart from fiscal concerns and stagnation in capacity, symptoms of declining response on fertiliser use were also noticed particularly in food grain production in the decade of 2000. The imbalanced use of chemical fertilisers and neglect of organic manure caused many problems, like stagnation in productivity, soil sickness, widespread deficiency of secondary and micro nutrients, spread in salinity and alkalinity, etc. On an all-India basis, the deficiency of sulphur has been found to be 41 per cent, zinc – 48 per cent, boron – 33 per cent, iron – 12 per cent and manganese – 5 per cent. Recognising the need for improvement of soil health and balanced fertiliser usage, the Indian government introduced various measures since 2008-09, including encouragement of customised, fortified and coated fertilisers; recognition of sulphur under FCO, etc. However, the sector needed reform to address the various issues and the Union Budget speech on 6th July, 2009 expressed it with clarity:

“In the context of the nation’s food security, the declining response of agricultural productivity to increased fertiliser usage in the country is a matter of concern. To ensure balanced application of fertilisers, the government intends to move towards a nutrient based subsidy regime instead of the current product pricing regime. It will lead to availability of innovative fertiliser products in the market at reasonable prices. This unshackling of the fertiliser manufacturing sector is expected to attract fresh investments in this sector. In due course it is also intended to move to a system of direct transfer of subsidy to the farmers”.

Article 3 Figure 1

Nutrient based subsidy

Found to be a feasible option for gradual reforms in the fertiliser sector the nutrient based subsidy’s (NBS) first step was to implement the subsidy on P and K fertilisers from April, 2010 and on SSP  from May, 2010. Currently, NBS is applicable on 22 fertiliser products, including di-ammonium phosphate, muriate of potash, monoammonium phosphate, triple super phosphate, SSP, various grades of complex fertilisers and ammonium sulphate. Subsidy under the NBS is similar for both domestic and imported fertiliser products. Primary nutrients—N, P and K and secondary nutrient—sulphur contained in the fertilisers are eligible for subsidy. Additional subsidy on subsidised fertilisers fortified with boron is Rs 300 per tonne and zinc is Rs 500 per tonne. Manufacturers of customised fertilisers and mixture fertilisers are eligible to source subsidised fertilisers as raw material for their products. Subsidy to the farmers is channelised through the fertiliser industry. The rates of subsidy in terms of nutrient are given in Table 1.

Assessment of NBS

NBS on P and K fertilisers have removed the fiscal concerns of the government and subsidy on P and K fertilisers is no more open ended. It is a fixed amount determined at the beginning of the year. Also, there has been a reduction in the rates of subsidy to a considerable extent after the implementation of the NBS. The subsidy calculation procedure has also been simplified and uncertainties regarding fixation of subsidy has been removed. Individual companies, both indigenous manufacturers and importers have the freedom to take commercial decisions. Moreover, there is an adequate availability of fertilisers in the market. Although NBS is a unique system and has a number of advantages, however, the partial implementation of NBS without bringing urea under its ambit has led to imbalance in price ratio between urea and P and K fertilisers and consequent NPK use ratio. There are also distortions in implementation of NBS by adhoc changes in the policy parameters from time to time impeding the smooth operation of the system.

Fig 2. Decontrol of phosphatic and potassic fertilisers led to reduction in the consumption of these fertilisers and nitrogen, phosphorus and potassium (NPK) use ratio was seriously disturbed. Thus urea  (N) became the most sought after fertiliser, with affluent farmers from Erode, Tamil Nadu (above) purchasing large quantities in bulk.

Fig 2. Decontrol of phosphatic and potassic fertilisers led to reduction in the consumption of these fertilisers and nitrogen, phosphorus and potassium (NPK) use ratio was seriously disturbed. Thus urea  (N) became the most sought after fertiliser, with affluent farmers from Erode, Tamil Nadu (above) purchasing large quantities in bulk.

Urea policy

Pricing of urea continues to remain under control. Retention pricing scheme in operation from 1977 has been withdrawn and replaced with group based concession scheme, known as the New Pricing Scheme (NPS), which came into force in April, 2003. NPS aims at greater transparency, uniformity, and efficiency in disbursements of subsidy payments to urea units—inducing them to take cost reduction measures on their own and be competitive. The scheme was implemented in three stages., (a) Stage I: April, 2003 to March, 2004, (b) Stage II: April, 2004 to March, 2006, extended upto September, 2006, (c) Stage III: From  October 2006. NPS Stage III, currently in practice, aims at greater efficiency in urea production and its distribution in the country. The Policy incentivises additional urea production beyond reassessed capacity. NPS Stage III seeks to promote the usage of natural gas, which is an efficient feedstock for production of urea. Under the NPS, 50 per cent of the movement /distribution of urea are decontrolled. However, retail price of urea continues to remain controlled.

Article 3 Figure 3

Urea industry has been facing numerous problems under the existing policy, including under provision in the budget, delay in payment of subsidy resulting in higher interest burden, non-revision of conversion cost for the last decade, lower return on additional production beyond full capacity (cut off capacity) due to rising gas cost, high maintenance cost for safe and efficient production of old units, etc. Thus, in all it can be said that there is an urgent need to implement the NBS in its true spirit with its objective being fully realised when urea is brought under the Policy. NBS is the right step towards ultimate deregulation of the fertiliser sector; providing for direct transfer of subsidy to farmers.

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