Rising global oil prices could lead to the Centre’s fertiliser subsidy Bill overshooting the budget estimate (BE) of Rs 70,079.85 crore for the coming fiscal, even as the Narendra Modi government is unlikely to allow the rates paid by farmers to increase in its last year ahead of the general elections in 2019.
The subsidy outgo on urea and decontrolled fertilisers (whose retail prices are not fixed) has fallen from Rs 99,495 crore in 2008-09 to Rs 66,313 crore in 2016-17. Even for the current fiscal, the Centre had budgeted a figure of Rs 70,000 crore, which has, however, been slashed to Rs 64,973.50 crore in the revised estimates (RE).
From the accompanying table, it can be seen that much of the subsidy reduction has taken place due to the slide in global fertiliser prices from their 2008-09 peaks. Just as in the case of oil, the gains from lower international prices were not passed on fully to consumers (farmers). Instead, they were pocketed primarily by the Centre; in oil, this happened through higher taxes, while in fertilisers it has been via subsidy savings. The per tonne subsidy — the fixed concession paid to manufacturers and importers — on di-ammonium phosphate (DAP), for instance, has come down from Rs 19,763 to Rs 8,937 between 2011-12 and 2017-18, and from Rs 16,054 to Rs 7,437 per tonne for muriate of potash (MOP).
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But that could change now, with global crude prices increasing and, in turn, pushing up fertiliser rates. As the table shows, the current landed price (cost plus freight) of imported urea, DAP and MOP are higher than their average levels of 2016-17. Moreover, the cost of fertiliser raw materials and intermediates are also up: imported phosphoric acid is now landing at about $678 per tonne (as against $570 last year at this time), while the same holds for ammonia ($358 versus $222 per tonne) and sulphur ($165 versus $120 per tonne).
In a scenario of rising international prices, there are two choices for the government. The first is to pass it on to farmers, which looks difficult in an election year. The second to provide for higher subsidy, for which the existing amount — almost equal to what was budgeted for 2017-18 — may not be enough.
However, there is a third possibility — fertiliser consumption coming down because of two new initiatives.
The Centre, from January 1, has rolled out a new system of disbursing fertiliser subsidy to companies only after actual sales to farmers registered on point-of-sale (POS) machines. Post-sale disbursal of subsidy — as opposed to the earlier system of companies being paid on receipt of material at the railhead point or approved district godown — is expected to weed out non-farmer buyers, similar to how neem-coating of urea has checked diversion of this fertiliser for non-agricultural use. The POS-based subsidy disbursal system has been implemented in 25 states from January 1 and is proposed to cover all states by March 1.
Secondly, the Department of Fertilisers, on September 7, issued a notification requiring sale of urea in 45-kg bags, in place of the existing 50-kg bags. Fertiliser companies have been given a six-month period to make the necessary modifications in their plants to enable retailing in the smaller bags. This is expected to again bring down consumption, as farmers normally apply fertilisers based not only weight but on the number of bags. So, the paddy or wheat farmer who was previously using three 50-kg bags of urea per acre will now consume three 45-kg bags.
“The lower subsidy outgo is mainly on account of urea, where the provision has been cut from Rs 49,768 crore in the budget estimate (BE) for 2017-18 to Rs 42,748 crore in RE and Rs 45,000 crore in the BE for 2018-19, whereas these have been correspondingly raised on decontrolled fertilisers from Rs 20,232 crore to Rs 22,251.80 crore and Rs 25,090.35 crore for the coming fiscal. I think the government clearly wants reduction in urea consumption and encourage more balanced fertiliser application,” said G Ravi Prasad, president (corporate affairs and strategic projects), Coromandel International Ltd.