Fertiliser subsidy: Experts say structural reforms in the offing

These could include direct cash transfer, encouraging rational use of fertilisers

The Centre’s decision on Thursday to allocate an additional Rs 65,000 crore towards fertiliser subsidy in 2020-21 will not only help wipe off arrears accrued from unpaid bills, but could also be a precursor to deeper structural reforms in the sector.

Experts and industry representatives feel the reforms could include a gradual transition towards direct cash transfer of subsidy, instead of routing it through companies, and a shift towards more rational use of fertilisers by capping the number of bags each farmer can purchase through the point-of-sale (PoS) device each season.

However, it is uncertain how farmers will react to the direct benefit transfer model for this subsidy. A survey done by global consulting firm Microsave in 2018 showed that about 64 per cent of farmers didn’t prefer cash transfers of fertiliser subsidy because of increased financial burden on them as almost 93.5 per cent of farmers purchased fertiliser with cash.

The survey of 11,289 farmers, of whom about 15 per cent were tenant farmers, showed that they did not prefer cash transfer of subsidy as they would have to incur a higher expenditure of over Rs 900-960 for a 45-kg bag of urea, up from Rs 245 a bag if prices are decontrolled.

Identification of eligible farmers will be another challenge as not all those who cultivate a field own it.  Despite these hiccups, players and experts remain optimistic that once all dues are cleared by FY22 the government might embark on new initiatives, as it will have a clean slate then.

“Yes, I think the move to fully clear subsidy dues in one go is a step towards deeper reforms in the sector. Already, there have been some changes in the pooled gas price calculation from this year and we believe that cash transfers could be attempted for fertiliser subsidy. The big question remains on whether it will be done at one go or in a phased manner by first raising the price of subsidised urea and then going for cash transfer,” Satish Chander, director general of Fertilizer Association of India (FAI), said.

Price of urea can be raised by bringing it under the nutrient-based subsidy regime as is the case with DAP, MOP and others.

“First price needs to be raised because paying a difference of 20 per cent between production cost and market price is easier than paying a difference of 70-75 per cent as is the case now,” Chander said.

The Commission for Agriculture Costs and Prices (CACP), the Centre’s main rate setting panel, in its rabi report for the 2021-22 marketing year released a few months back perhaps for the first time recommended a fertiliser cash subsidy of Rs 5,000 per year. The panel suggested that this be done in two tranches of Rs 2,500 each in the kharif and rabi seasons.

Though CACP’s non-prices recommendations are largely advisory in nature and the Centre is under no compulsion to implement them, the recommendations are significant. Sources said CACP’s calculation involves two parameters: Average subsidy of Rs 4,585 per hectare, and average farm size of 1.08 hectare. The CACP did not consider average usage for its estimate.

“The annual fertiliser subsidy of Rs 80,000-85,000 crore could be directly transferred into the bank account of farmers as the government in the last few years has collected a lot of data to identify farmers and map their consumption pattern. Also, it could limit the quantum of fertiliser each buyer can purchase,” said K Ravichandran, senior vice-president and group head of ICRA.