From Plate to Plough: The fertiliser challenge

The sector is ripe for reform. Will the Centre bite the bullet in the next budget?

Written by Ashok Gulati | Updated: December 21, 2015 12:05 am
With business as usual, agriculture cannot get on a growth trajectory of 4 per cent plus. Its neglect may eventually cost the nation heavily, politically and economically. 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.

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.

The writer is Infosys chair professor for agriculture at Icrier, Delhi.

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  1. K
    Dec 21, 2015 at 7:40 am
    We are taling of climate change, pollution and food contamination. The use of artificial fertilisers not only contaminates soil but it contaminates food as well. The hybrid stuff we eat is alredy causing health hazards. If more fertilisers are pumped in, thanks to concessions to fertilisers, only the big corporates will benefit. The farmer and the consumer wil be the losers heavily. Hence, natural fertilisers must be promoted in view of the farmer and consumr welfare.
    1. A
      Arun Sharma
      Dec 21, 2015 at 6:40 am
      Author must send his suggestions to PM.
      1. K
        Dec 21, 2015 at 2:14 am
        Mr Nitish Kumar is indeed “prime ministerial material”. The entire India as well many non-Indians recognise him as “the most competent and honest chief minister in the country”. As there is an absolute guarantee that the current accidental PM cannot continue in Delhi, Mr Nitish Kumar needs to prepare himself to be India's next PM. Mr Nitish Kumar is not only an able national leader, but also is recognised world-wide as a dignified statesman. India can at last heave a sigh of relief of having a leader that is not going to run after the goras for a selfie. The goras are not that special. But who is going to tell the primary-school qualified chaiwallah that?
        1. C
          C S
          Dec 28, 2015 at 1:13 am
          A good article and points well made. One may reiterate that: 1. The price increases of urea has lagged behind that of increases in Minimum Support Price for food grains. While the MSP of wheat went up by 2.6 times in the past fifteen years, from Rs 550 a quintal in 2000 to Rs 1450 in 2015, that of urea was raised from Rs 4000 to Rs 5360 per tonne during the same period, i. e 1.3 times only. In the last five years the price of urea has remained same, even though the MSP was increased by 34 percent. The relatively cheap availability of urea has resulted in its excessive consumption as pointed out by the author. 2. Till mid nineties there was a well-defined policy on the price given to the fertilser producers which took into consideration of the normative usage of feedstock, capital cost based on the vintage of the plant and allowed a post tax return of 12 percent on the net worth. That gave adequate incentive for the green field plants to be put up in the country. Since the decontrol of the fertiliser industry, there has been no clear cut formula in compensating the individual plants of the excess of cost incurred over the uniform farm gate price fixed for each type of fertiliser. That has led to uncertainties in the return on investment and consequently the capacity addition in the last decade has been minimal. The delay in reimbursing the subsidy to the industry has compounded its problems. 3. The country has no source of potium fertiliser and therefore the entire quany had to be imported. This to an extent applies to phosphatic fertilisers as well, due to limited availability of the raw materials needed. Much of it was made out of imported phosphoric acid. One cannot find any escape from this. 4. With regard to urea, if proper incentives were given to the producers and gas made available at the price applicable for domestic gas it would be advantageous to put up new plants. It was uneconomic to import LNG for producing urea in the country. It was a far cheaper option to put up fertiliser plants by Indian companies in Iran or Oman where gas was available cheaply, with a buy back arrangement as done by KRIBCO. A tonne of urea requires half tonne of LNG. It was far cheaper to transport two tonnes of urea than one tonne of gas in the form of LNG. The present fertiliser policy does not stand to economic reasoning.
          1. G
            Gagan Kumar
            Dec 21, 2015 at 3:50 am
            Boosting fertiliser industry is the need of the hour. There should be transparency in fertiliser subsidy and the subsidy bill should not remain unpaid in order to neutralise the demoralising effect in the industry. The cost of production in the urea industry is already high and modernisation is needed in the sector in order to reduce the cost. A balanced use of NPK fertilisers is necessary for maintaining the quality of the soil. For it the government should bring urea under the nutrient-based subsidy (NBS) scheme and recalibrate the relative prices of nitrogen, phosphorus and potium — urea prices should go up and phosphorus and potium prices inch down a bit. This will help encourage a balanced use of nitrogen, phosphorus and potium, while the overall subsidy may remain the same. A bold policy initiative is needed for this sector and direct cash transfer scheme to the jan dhan accounts of farmers may be the first step.
            1. R
              Dec 21, 2015 at 6:01 am
              With DBT, the idea should be to give cash direct to the end consumer & not subsidize manufacturers or farmers. the farmer should be able to sell at higher market prices or be able to improve productivity. Subsidies fail to achieve the real objectives and end up distorting the market.
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