One of the top economic priorities of Prime Minister Narendra Modi is to boost the manufacturing sector. Much of the effort to attract FDI is geared towards this.
But the fertiliser sector has not seen any major fresh investment in the last 15 years or so. Some urea manufacturers are even seriously thinking of downing shutters. This, when the highest growth in demand for fertilisers in the world is in India. The result is that imports are rising and production is largely stagnant — exactly the opposite of the aims of the “Make in India” campaign. The reason: Fertiliser policy is in a mess. Unpaid fertiliser subsidy bills to the industry have crossed Rs 40,000 crore, and will likely reach Rs 48,000 crore by the end of this fiscal year, as per industry estimates. The budgetary allocation of about Rs 73,000 crore for fertiliser subsidy is nowhere near the reality on the ground — arrears are mounting year after year.
The finance minister may be smart enough to show that the fiscal deficit is under control, but unpaid fertiliser and food subsidy bills have together already crossed Rs 1,00,000 crore. Keeping them out of the budget is not a good practice. If the government wants to subsidise food and fertiliser, it should be done in a transparent manner, by explicitly budgeting for them. Else, the credibility of the government
will be at stake as far as budgetary transparency is concerned.
Let us concentrate on the fertiliser sector — especially urea, as much of the subsidy on account of fertilisers is due to exceptionally low urea prices. Our prices of urea are perhaps the lowest in the world at around $85 per million tonne (MT) against $265/ MT in China and more than $360/ MT in Pakistan. Globally, prices hover around $300/ MT. Low urea prices have several undesirable effects. First, they lead to a higher subsidy burden. And when the government cannot pay up and postpones payment year after year, the industry gets deeply demoralised. No wonder, then, that no one feels like investing in this sector. This raises doubts about the possible success of the “Make in India” dream, especially when such a critical domestic industry is in the doldrums. Second, dependence on imports is rising, contrary to the “Make in India” slogan. More than one-third of nitrogen for consumption is imported today, compared to less than 10 per cent or so in 2000-01. Third, because of the highly distorted prices of nitrogen, phosphorus and potassium, the use of these nutrients is imbalanced, damaging soil fertility and breeding inefficiency in their usage. Fourth, due to the highly subsidised prices of urea, it is being diverted to neighbouring countries and for non-agricultural uses. Neem-coating can partially help arrest its use for non-agricultural purposes but not its smuggling to other countries.
What are the policy options? First and foremost, clear the arrears to bring some optimism in the industry and resurrect the government’s budgetary credibility. If not in one go, the finance minister could commit to doing this over two years. Blaming the previous government for the mess will not help. It is now the liability of the present government, which needs to find an amicable solution, and fast.
Second, bring urea under the nutrient-based subsidy (NBS) scheme and recalibrate the relative prices of nitrogen, phosphorus and potassium — urea prices should go up and phosphorus and potassium prices inch down a bit. This will help encourage a balanced use of nitrogen, phosphorus and potassium, while the overall subsidy may remain the same.
Third, propagate modern techniques like fertigation and bring soluble fertilisers under the NBS scheme. Through fertigation, soluble fertilisers can reduce the overall consumption of fertiliser, while boosting agricultural productivity and soil health — good economics, higher productivity, and greater environmental sustainability.
Fourth, a bold policy step would be to distribute the fertiliser subsidy through direct cash transfers to farmers on a per-hectare basis, coupled with the decanalisation of imports and decontrol of fertiliser prices. The issue of identifying the owner/ tenant can easily be tackled if the government is serious and focused. The great accomplishment of opening accounts under the Jan Dhan programme will not have much meaning if food and fertiliser subsidies do not become a part of direct benefits transfers (DBTs). China has already moved towards DBTs for input subsidies on fertilisers.
Last, should one really produce urea at home? The main feedstock for urea — gas — is available to the fertiliser industry at a pooled price of $10.5 per million metric British thermal unit (mmBtu), while it is available in many Gulf countries at less than $3/ mmBtu. Would it not be wise to set up plants in Gulf countries and have long-term contracts for imports? Already, urea produced in Oman can be imported at almost $135/ MT. So, would it not be ise to “Make for India” anywhere that is globally competitive, rather than “Make in India” at high cost?
Will the finance minister bite the bullet in the coming budget and put the fertiliser sector on an efficient and sustainable track? The problem is becoming elephantine in nature, and tickling its tail won’t do. One needs to take it head-on — neglecting the fertiliser sector for too long can cost India heavily in terms of food security. One hopes the government wakes up soon.