Reforming the Fertilizer Sector

AGRICULTURE/ GOVERNANCE

• GS-3: Issues related to direct and indirect farm subsidies
• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 

Reforming the Fertilizer Sector

Context: Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to 

• Keep a check on the rising fertilizer subsidy bill
• Promote the efficient use of fertilizers
• Achieve balanced use of N, P and K (nitrogen, phosphorus and potassium), 
• Reduce water and air pollution caused by fertilizers like urea. 

What are the issues with Fertiliser Subsidies in India?

1. Failed attempt to increase Price of Fertilizer

• The Economic Survey of 1991-92 noted that fertilizer prices remained almost unchanged from July 1981 to July 1991. 
• The Union Budget of July 1991 raised the issue prices of fertilizers by 40% on average. But from August that year, this was reduced to 30%, and small and marginal farmers were exempted from the price increase. 
• The Economic Survey further noted that even with this 30% increase, fertilizer subsidy remained substantial and needed to be reduced further.
• More recently, Fertilizer subsidy has doubled in a short period of three years. For 2021-22, the Union Budget has estimated fertilizer subsidy at ₹79,530 crore (from ₹66,468 crore in 2017-18)

2. Disproportionate use of Urea

• Due to opposition to increase fertilizer prices, the increase in the price of urea was rolled back to 17% in 1992 over the pre-reform price.
• This change disturbed the relative prices of various fertilizers and resulted in a big shift in the composition of fertilizers used in the country in favour of urea and thus N. 
• The ratio of use of N:P:K increased from 5.9:2.4:1 in 1991-92 to 9.7:2.9:1 in 1993-94
• Rather, there has been an uncontrolled increase in subsidies on urea, due to almost freezing the MRP of urea in different time periods and its rising sale due to low cost.

3. Inter-State disparities in fertilizer subsidy

• In 2019-20, fertilizer use per hectare of cultivated area varied from 70 kg of NPK in Rajasthan to 250 kg in Telangana.
• N,P,K ratio was 33.7:8.0:1 in Punjab and 1.3:0.7:1 in Kerala. 
• All these have implications for inter-State disparities in fertilizer subsidy due to high variations in subsidy content, which is highly biased towards urea and thus nitrogen.

4. Import Dependence

• The total demand for urea in the country is about 34-35 million tonnes (mln t) whereas the domestic production is about 25 mln t. 
• The requirement of Diammonium Phosphate (DAP) is about 12 mln t and domestic production is just 5 mln t. 
• This leaves the gap of nearly 9-10 mln t for urea and 7 mln t for DAP, which is met through imports. 
• In addition, consumption of complex fertilizers (NPK) is about 12-13 mln t, which is largely produced within the country and so the import requirement is only 1 mln t.

5. Volatile International Prices creating fiscal challenges

• Of late, there has been a surge in international prices with urea prices rising to a record level of over $900 per metric tonne (mt) in November 2021 from nearly $270 per mt in September 2020. 
• Likewise, the international prices of DAP have risen from about $360 per mt in September 2020 to about $825 per mt in November 2021.
• In order to minimise the impact of rise in prices on farmers, the bulk of the price rise is absorbed by the government through enhanced fertilizer subsidy. This is likely to create serious fiscal challenges.

6. Subsidy burden borne by Tax payers

• At current prices, farmers pay about ₹268 per bag of urea and the Government of India pays an average subsidy of about ₹930 per bag. 
• Thus, taxpayers bear 78% of the cost of urea and farmers pay only 22%. This is expected to increase and is not sustainable. 

7. Demand of subsidy for organic fertilizer

• Concerned with the adverse environmental impact of certain chemical fertilizers, some sections of society suggest the use of organic fertilizers and biofertilizers instead. 
• There is a growing demand to provide subsidies and other incentives for organic fertilizers and biofertilizers to match those provided for chemical fertilizers.

The Way Forward

In order to address the multiple goals of fertilizer policy, we need to simultaneously work on four key policy areas. 

• One, we need to be self-reliant and not depend on import of fertilizers. In this way, we can escape the vagaries of high volatility in international prices. 
  • In this direction, five urea plants at Gorakhpur, Sindri, Barauni, Talcher and Ramagundam are being revived in the public sector. 
• Two, we need to extend the Nutrient Based Subsidy (NBS) model to urea and allow for price rationalisation of urea compared to non-nitrogenous fertilizers and prices of crops.
• Three, we need to develop alternative sources of nutrition for plants like organic and biofertilizers. This also provides the scope to use a large biomass of crop that goes waste and enhance the value of livestock byproducts. 
• Finally, India should pay attention to improving fertilizer efficiency through need-based use rather than broadcasting fertilizer in the field. Ex: Nano Urea by IFFCO.

Conclusion

The above changes will go a long way in enhancing the productivity of agriculture, mitigating climate change, providing an alternative to chemical fertilizers and balancing the fiscal impact of fertilizer subsidy on the Union Budgets in the years to come.

Can you answer this question now?

Examine the distorting impact of agricultural subsidies. What reforms are needed to streamline the subsidy regime in India? Discuss