One Step Back

Given the current global trend towards free-market pricing, this marks a major step back. In fact, Chidambaram's announcement marks a retreat even from the grudging and partial decontrol that the previous government announced in 1992. The obvious question that arises is why.

The answer lies in complex political and historical reasons that have their roots in shortages in the fifties and sixties. The fertiliser subsidy, which is paid to the manufacturer, is the difference between the ex-factory realisation fixed by the government and the price that the farmer pays for the fertiliser which, again, is administered. In essence, then, it is a compensation that the government pays to manufacturers to sell their fertiliser cheaply to farmers.

 

The realisation is fixed for each manufacturer under a scheme called the Retention Pricing Scheme (RPS), which was introduced in 1977. This is the cost of production plus equated freight.

So, if the cost of manufacture goes up and the price that a farmer pays remains the same, the subsidy increases. For instance, a recent 30 per cent hike in naphtha prices is expected to increase the cost of production by 20 per cent and the subsidy by Rs 450 crore, according to the Fertiliser Association of India (FAI).

In the nineties, the fertiliser subsidy was questioned simply because the cash-strapped government was in no position to foot a burgeoning bill. So it decontrolled potassic and phosphatic fertiliser in 1992, though nitrogenous fertiliser (or urea) was untouched. The furore this move generated in the powerful agricultural lobby forced the government to backtrack and offer ad hoc concessions on these fertilisers.

The government attracted flak because the effects of this sudden decontrol were startling. The price of di-ammonium phosphate (DAP) increased from Rs 4,680 per tonne to Rs 7,900 to 8,200 per tonne.

The result: total consumption for nutrients dropped from 3 to 2.9 million tonne for phosphatic fertiliser and from 1.4 to 1.1 million for potassic fertiliser between 1991-92 and 1992-93.

Agronomists were also worried because fertiliser usage also changed drastically. Compared to a ratio of 5.9:2.4:1 for nitrogenous (which was still subsidised), phosphatic and potassic fertiliser, usage was skewed to 9.5:3.2:1. Agronomists say, this could have an adverse impact on cropping patterns in the long run.

Faced with strong farmer resistance, the government introduced an ad-hoc subsidy on DAP and other complex fertilisers. A provision of Rs 340 crore was made to sustain this scheme. In 1993-94 the allocation was further increased to Rs 756 crore.

But the major share of the fertiliser subsidy is still spent on urea. This year, the subsidy on urea is expected to be Rs 6,800 crore to Rs 4,500 crore for domestic production and Rs 1,648 crore for imports.

One of the main reasons, urea subsidies have burgeoned is that according to a set of index numbers available with FAI for the period between 1985-86 to 1995-96 urea prices increased by 41 per cent while the increase in prices of naphtha was 87 per cent, natural gas 113 per cent, railway freight 106 per cent, electricity 162 per cent and foodgrain 159 per cent.

It is true that any vote-conscious government is limited by the fact that it can only effect gradual increase in urea price. But the point is that the government has been moving in the opposite direction. The price of urea on June 10, 1994 at Rs 3,320 per tonne was less than the price on July 25, 1991 at Rs 3,300 per tonne.

Agronomists have been questioning the growing fertiliser subsidy on the grounds that the government is compensating manufacturers for producing fertiliser at costs that are often way above international norms. Should we be producing urea in the country at all or should we leave it to countries where natural gas is cheaper? We are always going to be short of natural gas. The power industry does not have enough natural gas, says Shashank Bhide, chief economist, NCAER.

Naturally, manufacturers' lobbies like FAI disagree. India, they say, is a major importer of fertilisers so the moment it enters the market, the price increases. It is demand-supply pricing, says Pratap Narayan, chairman of FAI. Bhide's counter to this: That is because imports are canalised and the international market gets a signal that we are short. If we were to increase imports gradually, international capacity would adjust to it. Also, if imports are decanalised and there were a thousand buyers, the prices would not increase in a sudden spurt.