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Neem-coated truth: Urea policy isn't a game-changer

The policy mandating urea manufacturers to produce neem-coated fertiliser is unlikely to solve the fiscal challenge confronting the government and the industry

Ashok Gulati

Kanika Datta  |  New Delhi 

Neem-coated truth: Urea policy isn't a game-changer

In January last year, the government made it mandatory for urea manufacturers to produce neem-coated urea up to a minimum of 75 per cent of their total production of subsidised urea, from 35 per cent earlier, and allowed them to go up to 100 per cent. This, government officials suggested, would be a game-changer. So much so that Prime Minister Narendra Modi included a mention of this policy in his Independence Day address. But can this initiative really make a radical difference?

With just one year since the policy came into play, it may be too early to judge. "We will need at least two or three seasons to assess the agronomic efficiency," says Rakesh Kapur, joint managing director, IFFCO, the Delhi-headquartered fertiliser cooperative. But even over a longer time frame, there is reason to doubt whether this initiative is as beneficial as its votaries suggest when set against the enormous challenges confronting the fertiliser industry and constraints on the government's budget.

Consider the intended benefits of the policy. When farmers use conventional urea, about half the applied nitrogen is not assimilated by the plant and leaches into the soil, causing extensive groundwater contamination. Spraying urea with neem oil slows the release of nitrogen, by about 10 to 15 per cent, concomitantly reducing consumption of the fertiliser. According to recent research, the "sustained release" nature of neem-coated urea has seen rice yields jump 9.6 per cent and wheat by 6.9 per cent.

Neem-coated truth: Urea policy isn't a game-changer
The neem-coating also precludes an age-old malpractice of this cheap fertiliser being diverted for use in the chemical industry and, most harmfully in states like Punjab and Haryana, as an additive in milk to whiten it.

The government has also allowed manufacturers to charge a small 5 per cent premium on neem-coated urea, which works out to roughly Rs 14 more on a Rs 50 kg bag. Ananth Kumar, Union Minister of Chemicals and Fertiliser, says the use of neem-coated urea (denoted as N, its principal chemical component) could save the government Rs 6,500 crore in subsidy annually.

This is a significant saving, but it pales beside the enormity-financially and politically-of the fertiliser subsidy that is paid on the three major fertilisers, N, phosphatic (P) and potassic (K). Of these, the heaviest subsidy is on urea, a policy that persists, it is said, on account of political pressures.

Urea retails at an administered price of Rs 5,360 a tonne, unchanged for several years, against an average production cost of Rs 18,000 a tonne. This means the government subsidises about 70 per cent of cost compared with 30 per cent or so on P and K fertiliser, prices of which were partially decontrolled under a nutrient-based subsidy scheme in 2010.

The big question

Neem-coated truth: Urea policy isn't a game-changer
No one denies the agronomic and environmental benefits of farmers using neem-coated urea; what is in doubt is the impact the policy will have on the dynamics of the industry. "If you have an elephant and you start decorating the tail, you are not going to change the appearance of the elephant," says Ashok Gulati, Infosys chair professor for agriculture at ICRIER, the Delhi-based think tank. The "elephant" in this case is the fertiliser subsidy the government is finding increasingly difficult to sustain. The Budget Estimate for the subsidy for the current financial year (that is, 2015-16), for instance, is Rs 71,969 crore. But this amount is misleading because it masks the fact that the year started with a Rs 40,000 crore arrears from the previous year.

Nor is this a new development. As a December 2015 note from the Fertiliser Association of India (FAI) points out, "Budget allocations get exhausted in [the] first five months of the financial year due to gross under-budgeting for [the] fertiliser subsidy in the successive Union Budgets. The year ends with carry forward of huge amount of unpaid subsidy bills which has been of the order of Rs 30-40,000 crores for the past three years."

Of this year's Budget allocation, the FAI's note points out, Rs 7,000 crore went towards repaying bank loans for the previous year, leaving the actual subsidy for 2015-16 at Rs 65,969 crore. "This amount got exhausted for urea with the payment... for August 2015, and for P & K fertilisers the allocation is expected to get exhausted with payment for … September/October, 2015," the note added. Fiscal 2016-17 is likely to start with similar arrears.

The irony of the subsidy policy, which was introduced in the seventies and eighties to promote domestic production of fertiliser and make it available to farmers at affordable prices, is three-fold. First, the government's inability to reimburse manufacturers on time means they have to borrow. According to FAI, their average outstanding on a regular basis has resulted in additional annual interest burden of about Rs 3,500 crore for the industry. "With hardly any margins available under the subsidy pricing regime, most of the companies are incurring losses on account of this additional cost of borrowing," the note said.

This situation has discouraged investment in new urea plants, so that the government is forced to import to make up the shortfall, which is about a quarter of its total urea requirement - even in a drought year like the 2015-16 kharif season, the government imported about 7.5 million tonnes between April and January.

Second, the average landed price of imported urea is $300 a tonne, which, at the exchange rate of $1 = Rs 69.14, is sold to farmers at $77.52 a tonne (all ports have facilities to spray this imported urea with neem oil). This large differential in retail prices has encouraged illegal and unaccounted for cross-border sales to Nepal and Bangladesh.

Third, the wide price differential between urea and P and K fertiliser- the complex fertiliser Di-ammonium Phosphate, for instance, retails at about Rs 24,000 a tonne - has discouraged the use of the latter, resulting in a serious nutrient imbalance in the soil. An FAI seminar paper showed that the N:P:K ratio was 10:4:1 in 2011-2012 against an ideal 4:2:1. Since then it has grown worse. Government officials say this applies only to six states but these are the principal agricultural states.

The problem, then, comes back to the administered pricing policy and the government's increasing inability to afford the subsidy. Mandating neem-coated urea, though beneficial, is unlikely to help solve these conundrums. Political compulsions, especially compelling after two years of drought, make this an inopportune time to raise prices. Allowing the industry to charge market prices and paying farmers a direct subsidy is one solution that economists and some manufacturers suggests as a via media - and the opening of Jan Dhan bank accounts provides one opportunity to get started. In that sense, neem only coats a bitter reality.

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First Published: Tue, February 16 2016. 21:07 IST