Fertilizer Subsidy: Key Issues
Nitrogen (N), Potash (K), Phosphorous (P), Calcium (Ca), Magnesium (Mg) and Sulphur(S) are macronutrient of the soil. Fertiziliers are used to increase their deficiency in the soil. Farmers find it unaffordable to pay the market price for the fertilizers, thus government gives subsidy for it. Fertilizer subsidy in India is the 2nd largest component of the total subsidy in the budget (2014) after food subsidy. Till 2010 fertilizer prices were controlled by the government of India, when nutrient based subsidy (NBS) was introduced which included decontrolled fertilizer prices, but it left out urea price which is still not deregulated. Under NBS subsidy regime moved from product based to nutrient based subsidy, in other words price of fertilizer is determined by the weight of particular nutrient present in the fertilizer. But it left out urea, price of which is still controlled by the government of India.
Problems caused due to price control of urea:
- Unsustainable use of urea: Ideally ratio of N: P: K should be 4:2:1, but at present it is 8.2:3.2:1 which is harmful for the health of the soil. Overuse of urea has caused ground water pollution along with decline in soil fertility especially in Punjab and Haryana region.
- Huge burden on government: Urea subsidy accounts for 66% of the total fertilizer subsidy, thus there is an urgent need to rationalise it to keep fiscal deficit in control.
- Urea subsidy is directly paid to the producers, so there is no incentive, to discipline the cost of production, for producers as subsidy is provided covering the cost of production.
- Leakages: Though government fixes the prices for the urea, still farmers, especially in Northern India, find its price varying due to hoarding which cause supply demand mismatch. Thus farmers never find fertilizer at price set by the government for urea at fair price shops.
Decontrolling the urea prices
Therefore not decontrolling the urea prices is only causing harm as mentioned in the above problems. Government should decontrol its price and should provide subsidy directly to farmers through direct cash transfer which will curb leakages etc. Then the fertilizer companies and their middlemen will have no advantage in smuggling. Decontrolling will incentivise domestic urea production in India, thus decreasing imports of urea. Further government should incentivise companies to set up urea production plants e.g. by providing naphtha, natural gas at lower rate done in New Urea Investment Policy. Around 75% of urea demand is met domestically and rest 25% is met through imports. Government should also incentivise companies setting up plants in West Asian countries where raw material is available, which government has called setting up of Reverse SEZs in West Asian countries and Myanmar. It cannot be done without political will at the highest level, as fertilizer pricing is a politically sensitive issue in India.
