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Resource centre on India's rural distress
 
 

Fertilising change

Right time for policy reform

The government is set to face disappointment on its expectation that the fertiliser subsidy will go down sharply this year due to a softening of international prices of fertilisers. It now appears almost certain that the total payable subsidy in 2009-10 may be around Rs 70,000 crore, against the budgetary provision of under Rs 50,000 crore. Since the government has made it clear that no additional allocation will be made for fertiliser subsidy, the unpaid subsidy arrears, which were brought down substantially last year by shelling out a whopping Rs 99,500 crore, partly in long-term bonds, are bound to start mounting again. This will, obviously, tell upon the fertiliser industry’s already fragile fiscal health and will worsen its liquidity crunch. Such huge annual outgo on fertiliser subsidy seems unsustainable, especially if the fiscal deficit is to be contained within reasonable bounds. Clearly, this is a matter of concern. But even more worrisome is the overall precarious fertiliser scenario which can hurt agricultural growth. Ad hoc and piecemeal changes in fertiliser policies since the 1990s have eroded the economic viability of this sector, discouraging new investment. There has been no capacity addition for over a decade now, while demand has steadily risen. While there has been an 8.2 per cent annual growth in fertiliser consumption in the past five years, urea production has stagnated and production of phosphoric fertilisers has marginally declined.

As a consequence of a widening domestic supply-demand gap, imports have increased. The gap between domestic production and consumption has risen from virtually nil in 2002-03 to 7.3 million tonnes in 2008-09, amounting to 34 per cent of the total consumption in the year. What is worse, increasing import dependence of India and China has pushed up international prices. Excessive government control and all-too-frequent and ill-conceived policy interventions have been the bane of the industry. Almost all aspects of fertilisers, including input costs, distribution pattern and sale prices, are controlled by the government. Several committees, including a joint parliamentary committee, have studied the problems of the fertiliser industry in great detail over the past two decades. Their recommendations have resulted in a variety of regulatory and pricing interventions, but nothing seems to be working. The government has made some sensible noises of late about new policy initiatives, but nothing much has yet happened. One such idea is to encourage a switch to a nutrient-based subsidy regime from the present product-based one. Second, to follow import parity pricing for specialised fertiliser products, such as quoted and fortified fertilisers, as also for urea produced from new capacity addition. Third, payment of subsidy directly to the farmers, rather than routing it through the industry. These ideas need to be implemented without delay. With international prices of fertilisers, their raw material and intermediaries at levels far below last year’s peaks, this seems to be the right time to carry out the much-delayed reforms in this sector.