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Waiting for Aadhaar
-The Business Standard

The transition to direct fertiliser subsidy will not be easy

The road map for direct transfer of fertiliser subsidy to farmers that Finance Minister Pranab Mukherjee outlined in the Budget has come under a cloud even before it is rolled out. Most in the fertiliser sector – including, notably, the fertiliser ministry and fertiliser dealers – are wary of trying it out, for fear that it might create more problems than those caused by the current system that it seeks to replace. Mr Mukherjee’s plan involves re-routing subsidy from the industry to fertiliser retailers as an intermediate step before it is paid directly to the farmers after they get Unique Identity (UID) or Aadhaar numbers. This has been considered necessary because of continuing uncertainty over Aadhaar’s time frame for enrolling farmers. However, the fear of glitches in implementation seems to have given the ministry cold feet. The new mechanism will, evidently, require the ministry to deal with several hundred thousand fertiliser retailers instead of a few fertiliser producers. This is more work, fewer large-scale beneficiaries, and a more unwieldy task — all reasons why a bureaucracy may be unwilling to make a change. The ministry argues, in contrast, that there may be greater scope for corruption than in the present arrangement — where it claims the key avenues of misappropriation of government funds by the industry, including overstating rated production capacity, have already been closed off.

The fertiliser retailers’ argument is different. Their concern is that they will have to buy fertilisers at market price and sell it to farmers at lower, government-dictated prices — later seeking compensation for the difference from the government. Retailers fear their money will remain locked up till the claims are settled — which may happen with a considerable time lag, as often happens currently with the subsidy payments to fertiliser companies. Often, those arrears are allowed to build up and even spill over to subsequent years, causing a chronic industry-wide liquidity crunch. There are instances of the subsidy arrears being cleared by issuing bonds, instead of cash, which are traded in the market at a considerable discount, to the detriment of fertiliser producers. Fertiliser retailers with limited working capital fear similar delays in subsidy reimbursement will drive them under.

It is clear that the movement to direct transfers is essential. However, the retailers’ argument is not a weak one. The government must consider alternative ways of managing the transition to an Aadhaar-based system. One way will be to extend the nutrient-based subsidy to urea and decontrol its prices, as has been done in the case of most other fertilisers. This will relieve the government of the need to assess the subsidy payable to each fertiliser plant — while, at the same time, discouraging the excessive use of urea vis-à-vis phosphatic and potassic fertiliser, a recent phenomenon which is impairing soil fertility. The problems of transition are a reminder that the UID project cannot be allowed to be delayed further, whether by bureaucratic inaction or political infighting. The sooner direct transfers can be set up, the better for everyone in the industry — and for the beneficiaries of the transfers.