Rolling back reform

Now, the government undercuts its own fertiliser reform

Reforms in the fertiliser sector were bumpy from the start, and are now apparently in reverse gear. Price decontrol of phosphatic, potassic and mixed fertilisers was crucial for reform; but now, in effect, that has been rolled back and caps have been placed on their maximum retail prices. The supposed justification? Unverified misgivings about "undue profiteering" by fertiliser companies. The price of urea, the largest-consumed nitrogenous fertiliser, was in any case still fixed by the government. Thus, retail prices of all fertilisers have again been brought under ministerial control.

This brings to an end the well-conceived and widely acclaimed nutrient- based subsidy system for non-urea fertilisers. This scheme, introduced in April 2010, was based chiefly on two premises. One was that the government would give a fixed subsidy on these fertilisers based on their nutrient content. The other, a truly reformist move that now stands annulled, was that the fertiliser companies would have the freedom to decide the sale prices of their products in view of the market conditions. Squeezing fertiliser companies from both these ends - which has been proposed now - is bound to strangle the industry and lead to adverse consequences for production, import and supply of fertilisers. The critical fact that is being disregarded is that the production and availability of non-urea fertilisers depend almost entirely on the import of either the finished products or the raw material and intermediaries for their local manufacture. Costs are, therefore, determined by international prices and the exchange rate of the rupee - both of which are variable. It is, therefore, illogical to impose a single retail price for the whole year or even a whole crop season.

Reform in this sector has been plagued by rollbacks since the beginning of the liberalisation process. In 1992, diammonium phosphate and muriate of potash were deregulated. Immediately after that, subsidies on these fertilisers were reintroduced, in the form of discounts on their sale prices. Similarly, the nutrient-based subsidy system, too, was enforced only partially, by excluding urea. The market prices of non-urea fertilisers kept rising, while those of urea were raised only once - and that too marginally, by 10 per cent. The consequent price disparity between urea and other fertilisers led farmers to use more nitrogenous fertilisers and less phosphatic and potassic fertilisers. This trend distorted a vital balance in nutrient application, and adversely affected crop yields and soil health. Yet, instead of extending the reforms uniformly to all fertilisers, including urea, the government has chosen to roll them back. If "profiteering" is a real concern, subsidies should be paid directly to farmers, bypassing fertiliser companies. Unless such meaningful reform is carried out, the investment drought in this sector is unlikely to end. And the dependence on imports to meet the growing nutrient demand will, thus, continue to mount - with obvious fiscal and other macroeconomic ramifications.