Fertiliser Subsidy: Direct Benefit Transfer

Indian Governance/ Economy

TOPIC:

General Studies 2:

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 


General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
• Issues related to direct and indirect farm subsidies 


Fertiliser Subsidy: Direct Benefit Transfer

Context:

• A survey conducted by NITI Aayog showed that nearly two-thirds of the farmers don’t favour direct benefit transfer (DBT) of fertiliser subsidy.

The present regime of fertilizer subsidy – Partial DBT (Since April 2018)

• Manufacturers of fertilizers receive 100% of subsidy after fertiliser is delivered to the farmer, and the latter’s identity viz. Aadhaar is captured on the point of sale (PoS) machine at the dealer’s shop.
• Therefore, the subsidy continues to be routed through manufacturers even though the sale of fertilizer is being verified using Aadhar ecosystem
• The manufacturers sell urea at the maximum retail price (MRP) controlled by the Centre, which is kept at a low level. They also get subsidy reimbursement on unit-specific basis under the new pricing scheme (NPS).
• The manufacturers of non-urea fertilisers are given ‘uniform’ subsidy (on per nutrient basis) under the nutrient based scheme (NBS).

Example to illustrate the scheme

• At present, for a bag of urea (containing 50 kg) a farmer pays Rs 268 —as against the cost of supply that is at least twice as much , or Rs 536
• The difference is claimed by the manufacturer as subsidy from the government (after the sale to farmer has been verified through Aadhar) 
• Under this arrangement, subsidy to farmer is embedded in the price—also termed as subsidised price.

Implications: 

This system helps ensure the subsidy is not being siphoned off by another beneficiary, but it doesn’t help the larger issue of farmers overusing urea many times over as there is a huge subsidy on it.

The unacceptably large urea subsidy has ensured that against the ideal N:P:K ratio of 4:2:1, the average is 6.1:2.5:1, and it is as much as 25.8:5.8:1 in states like Punjab.

What is the full-fledged DBT scheme?

• The farmer will have to pay the higher cost-based price or Rs 536 to the manufacturer, and get subsidy of Rs 268 ‘directly’ in his bank account.
• In total, he will be spending Rs 268 only for  bag of Urea.
• Yet, the switch-over makes a big difference as he has to first pay the full price, and thereafter, get the subsidy.

Benefits of Direct Benefit Transfer Scheme:

• It will empower farmers to make the right choices based on crop/soil need, as now the market for fertilizers will be less under government control
• It reduces imbalance in fertiliser use – as  DBT would mean a dramatic increase in urea prices, farmers would buy only the amount of urea they really need and more of other fertilisers
• It improves efficiency in the supply chain as now private players will be encouraged to enter the sector and give a boost to ‘Make in India’. 
• It will lead to saving on the subsidy by eliminating misuse, and owing to better targeting.

Why government has not undertaken full-fledged DBT?

• Inadequate working Capital among farmers: 

• Farmer has to sell out entire cost price of fertilizer (if subsidy is not provided before hand by the government). Given that 85% of Indian farmers are small and marginal and that their incomes are meagre it would be burdensome for them to arrange for this high upfront money.
• This would make them depend on informal money lenders making them vulnerable to debt trap

• Cash- Strapped government which puts it in a politically difficult situation for DBT

• In FY 2020, the government could end up owing Rs 60,000 crore to the industry. While it is possible to accumulate such dues in the current system (partial DBT), the government will have to make upfront payment to farmers to overcome the above obstacle
• If farmers don’t get the subsidy before they buy the fertiliser, they will never buy it as doing so will mean a big dent in their budgets – thus impacting production & food security
• Cash- strapped government will thus not be able to postpone payments (which is being done in present system). Owing payment to farmers will be politically sensitive issue which is thus deterring government to adopt full-fledged DBT

Way forward

Government should ensure fiscal discipline and undertake reforms in subsidy management (rationalisation and DBT) so as to ensure that neither the food security of a Nation nor the welfare of farmers is not compromised.

Think!

DBT in food subsidy, Food coupons

Sustainable agriculture – Organic farming – Zero Budget Natural Farming