The Union Budget for 2012-13 generated huge expectation about the Union Government’s keenness to reduce ballooning subsidies that have been a major source of its fiscal targets going awry.

The then Finance Minister promised to contain the total subsidy bill within 2 per cent of the GDP in the current fiscal and at 1.75 per cent in the next three fiscals. However, there is little to show for any credible action plan in this regard. The recent measures to restrain subsidies in diesel and LPG are too little and too late. As far as fertilisers go, the powers-that-be have not even demonstrated a basic intention to walk the talk.

The Cabinet Committee on Economic Affairs has recently approved a meagre increase of Rs 50 a tonne in the retail price of urea (less than 1 per cent). The subsidy savings from that would be a pittance – Rs 50 crore, which works out to 0.25 per cent of the total of Rs 60,000 crore allocation for 2012-13.

No big bang

In what may sound bizarre, the Fertiliser Minister has resisted even this, which demonstrates total imperviousness to change. The big bang reform — as claimed — is a distant cry!

An Empowered Group of Ministers had earlier recommended deregulating urea prices and bringing it under the nutrient-based subsidy (NBS) regime. A Committee of Secretaries was, then, asked to work out the modalities of the plan, which is now practically shelved.

Phosphatic (P) and potassic (K) fertilisers were brought under the NBS in April 2010. Under NBS, the Centre can cap subsidies at the level it wishes, and while producers are free to adjust the maximum retail price (MRP) to reflect changes in manufacturing or import costs after factoring in the subsidy concession.

Logically, urea, which supplies around two-thirds of nitrogen (N), should also have been under NBS. But this was avoided. Under the New Pricing Scheme (NPS), the MRPremains controlled.

All along, urea has been a holy cow. Thus, in 1992, though P and K fertilisers were de-controlled, urea was not. The latter remained under the Retention Price Scheme, which has since been rechristened as the NPS.

Skew towards urea

For two decades, we have lived with different policy dispensations for urea, and P and K fertilisers that work at cross purposes. While NPS/RPS for urea encourages excessive use, NBS for P and K discourages their use.

This has skewed the NPK fertiliser-use ratio towards urea, therefore progressively worsening the overall soil nutrient imbalances and also effecting crop yields. The Government is well aware of all this, as evident in its various policy documents. Yet, there is no corrective action.

About 75 per cent of urea demand is met indigenously. While 80 per cent of P fertilisers used consists of imported material, all of our K fertilisers demand is met through importsClearly, the vulnerabilities are more in P and K fertilisers; yet these receive scant attention.

For 2012-13, the subsidies on P and K fertilisers under NBS were drastically reduced. This has led to a spike in prices: they are up 3-4 times since 2010. The urea MRP, on the other hand, has risen by only 10 per cent.

During kharif this year, poor monsoon rains have brought down overall fertiliser use. However, whereas consumption of P and K fertilisers went down by 30 per cent, that same for urea has declined only by 5 per cent, thus further aggravating the imbalance.

Leakage

An estimates 30 per cent of urea sold in the country is diverted for industrial use. The subsidy meant for agricultural use is, hence, guzzled by dubious operators. There is also rampant smuggling to neighbouring countries that do not subsidise fertilizers.

In the face of unabated and rampant profiteering on the ground — right under the nose of administrators — at the expense of taxpayers’ money; all official pronouncements to reign in the ballooning subsidy would seem hollow.

A tracking system for fertiliser sales is now being proposed.. Under this, the subsidy would be released to producers only after ‘confirmation’ of receipt by dealers. One wonders whether this may not lead to payments crisis, instead of tackling the underlying malaise!

Urea can be imported only by State agencies. Increasing dependence on import (no capacity addition in the last decade) has led to higher subsidy on imported urea. It means our subsidy regime helps exporters to India make more money!

Indian companies have set up joint ventures abroad in countries that are rich in gas, such as that ofIffco and Kribhco in Oman. However, India does not benefit as under the buy-back agreement, as the international price is what gets charged.

About a fifth of urea capacity is based on naphtha and fuel oil. High production costs based on these expensive feedstock gets protected under NPS. The Government has no plans to remove this protection.

A new investment policy for urea has been in the works for two years and is yet to see the light of day. A policy based on import-parity pricing was put in place in 2008, which, too, has not attracted any new investment.

So, we have on our plate a highly disjointed policy framework that breeds imbalances and inefficiencies in fertiliser use; a flawed policy for urea that protects high costs and inefficiencies; and an enforcement machinery that glosses over leakages and misuse. And, all this is capped by an astounding subsidy close to Rs 1 lakh crore!

The Government knows what to do; what it lacks is the political will to do what it knows to do.

(The author is Executive Director, CropLife India.)

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