The Hindu Business Line : Revitalising the regime

The Government is in favour of moving towards a nutrient-based subsidy regime. But will this move attract investments and, more importantly, check soil deterioration?

— V. Raju

There is a skew in fertiliser consumption, with wide variation across States and regions.

G. Chandrashekhar

The country’s fertiliser regime has always been too complex for anyone’s comfort.

None of the stakeholders — neither the farmer who is the product user nor the industry the producer or the Government that doles out subsidy — ever appeared happy with the extant controls and restrictions. The country is not self-reliant i n chemical fertilisers.

Among major fertilisers, the critical bottleneck in the production of urea is the limited availability of natural gas/LNG. DAP (Di-Ammonium Phosphate) production is dependent on availability of imported raw material/intermediates such as rock phosphates, phosphoric acid, sulphur, etc. Owing to limited availability and fluctuating prices of raw materials/intermediates in the international market, production of DAP and complex fertilisers has remained stagnant.

Fertiliser consumption

The consumption of fertilisers during the Ninth Plan period and initial years of the Tenth Plan period was stagnant. However, a combination of good monsoon, increase in cultivated area, improved awareness about usage of fertilisers and better purchasing power in rural areas has resulted in a sharp increase in consumption of fertilisers, especially from 2004-05 onwards.

Despite improving availability and expanding usage of chemical fertilisers, the per hectare consumption in the country in nutrient terms is around 115 kg only (112 kg and 105 kg in the previous two years), far less than that of many other developing countries. For instance, China consumes close to 300 kg/ha. The positive relationship between fertiliser use and yields is well known.

While rising consumption is a positive sign, the productivity response has been rather muted. It is known that around 70 per cent of the total fertiliser consumption in the country is on foodgrain crops. Importantly, most of the fertiliser consumption is in irrigated area.

Environmental damage

In other words, there is a skew in fertiliser consumption, with wide variation across States and regions. It is also common knowledge now that high-input regions of Punjab, Haryana and Uttar Pradesh have become environmentally fragile.

Soil health has deteriorated and water-table has declined to alarming levels. An ecological disaster is waiting to happen in these regions. Urgent measures to arrest the deterioration are warranted. Crop diversification is absolutely necessary. The politically-expedient policy-driven system of grain mono-cropping needs to be broken, and use of organic sources (bio-fertilisers) and the like to restore soil health is warranted.

The limited response of yields to increased fertiliser application has serious implications for the country’s food security. The Government is also aware of the adverse effects of imbalanced use of fertilisers — excessive in some regions and too modest in others.

Above all, fertiliser subsidy has been ballooning in recent years. For 2008-09, it reached an unprecedented and wholly unsustainable Rs 1,00,000 crore, up from Rs 43,300 crore in 2007-08 and Rs 28,000 crore in 2006-07. Sharp rise in international prices since 2006-07 and unchanged domestic prices account for a substantial portion of the subsidy.

Yet, on the ground, there is little to show by way of an increase in productivity levels of major crops in the last two years.

There are also allegations that the subsidy is largely mopped up by the manufacturing industry. Have farmers benefited from the extant regime? There is no doubt that farmers have been insulated from exposure to high and volatile international prices.

The Government has defended the present subsidy regime by arguing that the fertiliser subsidy is transferred to farmers in the form of subsidised Maximum Retail Prices which of course are much below the normative cost of production and delivery at the farm gate level.

The farmers thus obtain the benefit of subsidy on fertilisers, but indirectly. The MRP of fertilisers fixed in February 2002 remains unchanged till date, despite rising costs.

At present, urea is the only fertiliser under partial movement and distribution control of the Government. All other fertilisers, namely DAP, MOP, NPK and SSP, have been decontrolled/de-canalised since 1992.

Now, policymakers seem to be keen to ward off any further criticism that the extant regime favours manufacturers. Also, there is recognition that continuing imbalanced use of chemical fertilisers has resulted in looming threat to food security.

Nutrient-based regime

No wonder the Finance Minister made a categorical statement in his Budget speech of moving towards a nutrient-based subsidy regime. He believes it will lead to availability of innovative fertiliser products in the market at reasonable prices.

Importantly, as the Finance Minister expects, the unshackling of the manufacturing sector would attract fresh investment. But how would the nutrient-based subsidy regime work? And, importantly, would it address the critical issue of soil health deterioration?

The Government is on record that according to rough estimate, the total removal of plant nutrients (NPK) by foodgrain crops is around 32 million tonnes (mt) at the present level of foodgrains production 230 mt. The replenishment of nutrients (NPK) through addition of chemical fertilisers is nearly 16 mt assuming 70 per cent of 23 mt of fertiliser nutrients is consumed by foodgrain crops.

Organic sources

About 6 mt of nutrients may be added through manures, leaving a total nutrient gap of 10 mt. This nutrient gap has to be met from bio-fertilisers and other nutrient sources. It is also an admitted position that imbalanced use of chemical fertilisers (significantly different from the desirable ratio of 4:2:1) and low addition of organic matter over the years has caused widespread multi-nutrient deficiencies and deterioration of soil health. The deficiencies of sulphur, zinc and boron are said to be more widespread.

Clearly, soil conditions, crop type and agronomy should dictate the amount and nature of fertiliser to be applied. In the event, soil-test based site-specific integrated nutrient management is necessary.

It also calls for conjunctive use of inorganic and organic sources of plant nutrients (compost, bio-fertilisers).

It is, of course, a great idea to unshackle the fertiliser industry. The sooner we throw the sector open the better. But there is no guarantee that merely by freeing the industry dramatic changes in availability and prices in favour of farmers would result.

From the Finance Minister’s Budget speech, it is abundantly clear that the Government realises there is no escape from fertiliser subsidy. Also, New Delhi intends to move towards a system of direct transfer of subsidy to farmers, in due course.

Maximum Retail Prices of chemical fertilisers have remained unchanged since February 2002. The actual cost of production is said to be roughly 4-5 times higher. At the current subsidised MRP, the cost of 115 kg of fertiliser applied on an average per hectare works out to approximately Rs 1,400-1,500.

The gross area under cultivation of major crops is an estimated 165 million hectares. Here is a simple calculation. Assuming the Government delivers directly to farmers the fertiliser subsidy at the rate of, say, Rs 4,000 a hectare, it would involve an outgo of Rs 66,000 crore; and at Rs 5,000 a hectare, the outgo would be Rs 82,500 crore.

Such direct payment would allow farmers the freedom to access the most suitable fertiliser. It would also free the industry from unnecessary restrictions and foster competition. This idea is in no way intended to be the last word, but something that would trigger a debate on how best to support farmers with direct subsidy even while allowing the industry the freedom to operate and innovate.

( blfeedback@thehindu.co.in)