Re-working the subsidy

The fertiliser subsidy bill, which used to be around Rs 13,000 crore till the beginning of this decade, has surged to over Rs 28,000 crore. Even as the numbers have climbed, the government has not been setting apart adequate resources in successive Budgets for such pay-outs to be made. As a result, the arrears of subsidy that the government owes to the fertiliser industry have steadily mounted, reaching over Rs 12,000 crore now. Since the finance minister has once again set apart only Rs 22,450 crore for the fertiliser subsidy in the 2007-08 Budget, it is apparent that these arrears are not likely to be cleared even in the next financial year. This has obvious implications for the financial health of the highly regulated fertiliser industry. In case the arrears begin to adversely affect fertiliser production, as they well might, the consequences would be grave. Fertiliser consumption is growing, the increase this year being around 10 per cent, and any decline in domestic production would necessitate more imports. The international prices of fertilisers have already firmed up substantially, and larger Indian demand is bound to push them up further. If sufficient imports are not undertaken, thus leaving some fertiliser demand unmet, there will be a drop in farm production""which is the last thing the government wants when it is talking of accelerating agricultural growth to 4 per cent per annum.

It is in this context that one needs to view Mr Chidambaram's budgetary proposal for finding an alternative method of delivering the subsidy directly to farmers, rather than to the manufacturers of fertilisers. The view is that the subsidy today serves to protect inefficient fertiliser manufacturers, and not the farmer. Nevertheless, the fertiliser industry is likely to welcome a change, largely because the scope for claiming excessive subsidy payments by gold-plating plants (i.e. building in additional, unreported capacity) has been largely plugged through a reassessment of the actual capacity of each plant. In fact, the more efficient segment of the industry, represented by the fertiliser co-operative Iffco, has already demanded a change in the mechanism for delivering the subsidy. The industry's main argument in favour of this is that it should not be forced to perform the government's job of delivering the subsidy, and that too when subsidy payments from the government are delayed and irregular. The government benefits in that it puts an end to some of the distortions that have crept in because of the way in which the subsidy is calculated.

While this means that both the government and most of the industry would welcome a modification of the subsidy model, what cannot be overlooked is the track record of the official machinery in delivering benefits to clearly targeted individuals. From that viewpoint, Mr Chidambaram is right in stipulating that an alternative system should first be tried out on a pilot basis in one district in each state. One of the suggestions that has come from the noted agricultural expert, M S Swaminathan, is to introduce a smart card that enables farmers to buy not only urea but other major and micro plant nutrients as well, depending on the requirement of the crop and the soil. The added advantage of such a move would be that the subsidy-driven imbalance in the use of fertiliser nutrients, which today is ruining soil health, will tend to get rectified. However, regardless of the manner chosen to hand down the subsidy, care would have to be taken to ensure that it reaches the intended recipients and is not misappropriated on its way down.