The application of fertilisers was popularised during the Green Revolution of the 1960s and the 1970s to help boost crop yields. The simultaneous application of fertilisers led to an increase in the country’s average wheat productivity from 851 kg/hectare in 1960-61 to 1,307 kg/hectare in 1970-71. Increment in the usage of fertilisers over a period of time proved to be of tremendous contribution to the success of Green Revolution; it helped improve agricultural productivity and transformed India into a nation that could feed itself.

An increase in the costs of mineral-based fertilisers after the 1973 oil crisis forced the Government to plan out strategies to encourage the use of these fertilisers, sighting their importance in improving the nutrient value of the soil. Thus, the Government provided reimbursements to companies to compensate for high cost of production for the mineral-based fertilisers and for selling it at low costs to the farmers.

However, even after the tremendous contribution, today, the fertiliser industry finds itself in a rather unfortunate and untenable situation; the current trends depict that the marginal productivity of soil is declining despite application of fertilisers. Moreover, the industry has not been able to free itself from the clutches of regulation, even though the Government has, over the years, professed free market economics and liberalisation.

INDUSTRY ISSUES

Imbalanced fertilisation: In April 2010, the Government introduced the nutrient-based subsidy (NBS) regime to release the industry from stifling controls, but implemented the scheme selectively only on non-urea fertilisers. Under this policy, the market price is determined based on supply and demand factors and the Government pays a fixed subsidy. This has made P&K (phosphatic and potassic) fertilisers commercially viable, resulting in increased production and availability.

On the other hand, urea, accounting for almost 50 per cent of fertiliser application was left out of the NBS regime. As a result, production costs for P&K fertilisers have soared in the last three years due to high global input prices.

The cumulative effect of this has been a depletion in the NPK use ratio (normally accepted ratio being 4:2:1) to 6.7:3.1:1 in 2011-12, resulting in imbalanced fertilisation.

Fiscal deficit : Fertiliser subsidy is the most debated issue in the country today, as the government is looking to contain the fiscal deficit alongside rolling out a Food Security Bill. Fertilisers, after oil and food, account for the third-biggest share of India’s total subsidy bill, which is estimated at Rs 2,20,971.50 crore for the current fiscal. On the other hand, Fertiliser Ministry is facing a major cash crunch and has not been able to pay reimbursement amount to the companies. Recently, the Ministry arranged for Rs 5,000 crore bank loans for fertiliser companies. Subsidy bill payments have been delayed by over seven-eight months for P&K fertilisers since last July and for urea since last August.

Stagnant investments: A highly regulated and controlled regime over a long period has made the fertiliser industry practically unviable. The current mechanism does not incentivise efficiency and new investments. In fact, since 1999, no new plant has been commissioned to manufacture urea.

In some cases, this regime resulted in the shutdown of some plants leading to a reduction in capacity. Due to negligible capacity additions, dependence on imports has increased significantly. The fertiliser industry plays an important role in ensuring food security of the country. To ensure food security, there is need for self-sufficiency in domestic production of fertilisers, particularly, urea.

Other issues: The Government is worried about the mis-utilisation of subsidised urea. In its view, subsidised urea is getting diverted for non-agricultural use. Since retail price of urea in India ($98 per tonne) is way below that in neighbouring countries such as China ($348), Pakistan ($344) and Bangladesh ($250), it is also worried about the cross-border illegal trade of urea. Such diversions are inevitable when prices of any controlled commodity are lower than the actual market price.

PROSPECTIVE SOLUTIONS

Here are the few possible solutions to the above issues:

Direct subsidy transfer to farmers : The Government can shift to a system of direct transfer of fertiliser subsidy to farmers in a phased manner, starting with monitoring movement of fertilisers up to the retail points. This will help farmers buy high-priced complex fertilisers at reasonable prices, but the issue of fiscal deficit continues to impact the sector. Also, in a vast country such as India, implementation of any policy at the grassroots level always has certain limitations.

Phased increment in urea prices: A phased increase in urea prices and compensation for a raise in fixed costs should follow promptly to de-control farm gate price eventually. Henceforth, frequent revision of urea tariffs should be proposed by the Government to close the wide gap between urea and P&K fertilisers to enable efficient usage and better agricultural productivity. But, urea subsidy being a politically-motivated issue faces a lot of hurdles in the process.

The balanced solution

NBS is a step in the right direction. It will not only help in achieving a balanced nutrient consumption but also improve the Government’s finances. The policy is also expected to bring in more transparency and investments into the sector, which relies on imports heavily and suffers from lack of production capacity. There had been no fresh investments in the sector for more than a decade due to uncertainty in the pricing structure.

The present subsidy regime is skewed heavily in favour of urea, leading to its imprudent and unabated use. Therefore, there is a need to increase urea prices and bring parity with P&K fertiliser prices to maintain NPK balance.

This will help by restoring the nutrient consumption balance towards ideal NPK ratio of 4:2:1, resulting in increase in crop yields and improvement in soil health.

Subsidies undoubtedly have played a significant role in promoting fertilisers, but they have been questioned in recent years due to their declining contribution, inequity and government’s expanding budget deficit. The need of the hour is to move towards an environment for holistic development of the sector with the goal of achieving efficiency and self-sufficiency.

(The author is Managing Director, Tata Chemicals Ltd.)

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