Subsidy reform: Making direct benefit transfer work in fertilisers

Paying market prices upfront is more difficult in nutrients than in LPG

Written by Harish Damodaran | New Delhi | Updated: March 3, 2016 6:23 am
budget 2016, budget farm policy, budget fertilizer subsidy, subsidy reforms, fertiliser subsidy dbt, aadhaar fertilizer subsidy, Direct Benefit Transfer, Direct Benefit Transfer fertilizer subsidy india news, latest news Implementing the Pahal-DBT model in fertiliser will also require arriving at indicative non-subsidised market rates, linked to international prices.

Finance Minister Arun Jaitley, in his Budget speech, has proposed extending the Direct Benefit Transfer (DBT) model in LPG to fertilisers, by introducing it on a  “pilot basis…in a few districts across the country”.

Before analysing its feasibility, one must highlight two major reasons for DBT’s success in LPG (since November 2014, when it was re-launched under the current government’s Pahal scheme, about Rs 29,600 crore of subsidy has been transferred to 15.2 crore beneficiaries).

Firstly, the number of subsidised cylinders a household is entitled to under Pahal is capped at 12 per year. While households buy at the non-subsidised ‘market’ price and have the subsidy transferred to their bank account (linked to both Aadhaar and LPG customer number) within three days, there is no transfer after the 12th cylinder has been purchased.

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Secondly, both the subsidised price (currently Rs 419.33/cylinder in Delhi) and so-called market price (now Rs 513.50) are determined by the Centre. Since there is only one market price at a given time, the subsidy, too, is uniform.

The combination of both — a fixed subsidy at any point and not more than 12 transfers per connection per year — makes DBT in LPG relatively easy to implement.

In fertilisers, the maximum retail price (MRP) for urea is subsidised ‘at source’ and fixed by the Centre at Rs 5,360 per tonne or Rs 268 per 50-kg bag. The MRPs for other fertilisers are technically decontrolled. Companies, however, are expected to fix these at ‘reasonable’ levels in return for being paid a fixed per-tonne subsidy.

The MRP of di-ammonium phosphate (DAP), for example, now ranges between Rs 23,000 to Rs 25,000 per tonne, while ruling at Rs 15,000-15,500/tonne for muriate of potash (MOP). The subsidy on both ‘decontrolled’ fertilisers (Rs 12,350 for DAP and Rs 9,300 for MOP) as well as on urea (which varies depending on assessed production costs for each plant) is paid to companies.

harishUnder DBT, the subsidy would be delivered directly to the bank accounts of farmers. The practical feasibility of making such transfers per se has been demonstrated in Uttar Pradesh, where the state government has created an online database of over 40 lakh farmers, each assigned a unique ‘Kisan ID’ identifying their village, land particulars, bank account and mobile numbers. This DBT portal was used to transfer Rs 140 crore of subsidy on seeds into the accounts of some nine lakh farmers during the recent rabi season.

But replicating the DBT model in fertilisers requires more than just a robust system of identification for eliminating fictitious/duplicate beneficiaries. This would mean, firstly, capping the number of bags on which the subsidy is payable, based on a reasonable assessment of requirement. That, in turn, would depend on the specific fertiliser as well as the crop and location where it is grown – making it more complicated than the straight ‘one product-12 cylinders’ formula in DBT for LPG.

Thus, the per acre fertiliser requirement in wheat and paddy may be two bags of urea, one bag of DAP and half a bag of MOP. But for potato, this could be 2 bags each of urea and DAP, and one bag of MOP. The annual requirement for a wheat-paddy farmer in Punjab would, then, be 4 bags of urea, two bags of DAP and one bag MOP per acre. If the subsidy is limited to five acres — as the UP government has done for seeds — the farmer’s total entitlement comes to 20 bags of urea, 10 bags of DAP and 5 bags of MOP.

Implementing the Pahal-DBT model in fertiliser will also require arriving at indicative non-subsidised market rates, linked to international prices. At current per-tonne landed costs of $ 225 for urea, $ 400 for DAP and $ 270 for MOP – and adding 5 per cent import duty and average domestic handling-cum-distribution costs of Rs 3,000 – the corresponding per-bag prices would be roughly Rs 950, Rs 1,575 and Rs 1,110 respectively. The total annual outlay for a paddy-wheat farmer, based on the above rates and bag requirements, would work out to around Rs 40,300 over five acres.

Even if this outlay is spread over two seasons, the issue of upfront payment here is far more serious than in LPG cylinders. Not all farmers can pay Rs 20,000 now and wait for the subsidy to be credited to their bank accounts.

Moreover, as the accompanying table shows, global fertiliser prices — based on which the indicative market rates are to be fixed — are currently low. In the event of prices hardening, the problem of upfront payment becomes even more challenging.

This is where a proposal by Amit Mohan Prasad, principal secretary (agriculture) in UP government, may be worth considering. In a recent article for The Indian Express (http://goo.gl/DkR45h), he has made a case for issuing Kisan Subsidy Cards to be used solely for making upfront payments on subsidised inputs like fertiliser and seed.

Such payments would be allowed only through custom-made swipe machines at fertiliser/seed stores, with the card

getting ‘recharged’ when the subsidy from the government is transferred into the farmer’s bank account. Prasad has further suggested that the payment limit per card be set within the maximum borrowing limit of Rs 3 lakh on Kisan credit cards that banks are already issuing.

 

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