It is not often that you see such radical suggestions in a study specially, commissioned by the Finance Minister. But then, the state of fertiliser subsidies is dire enough to drive even the most polite economists to blunt talk.Sample this: ‘‘Fertiliser subsidies should be done away in their present form,’’ says the report by the National Institute of Public Finance and Policy (NIPFP), which Finance Minister P. Chidambaram is mulling over as he prepares Budget 2005-06.The study, which was conducted to see how subsidies could be targeted better, also strongly indicates that it might be better to close down many of the public sector fertiliser units that have been sucking government funds away. It goes as far as to try and work out what would happen if the fertiliser subsidy were done away with altogether and the farmers were supplied urea at import parity prices.The reason for seeking such extreme alternatives is not far to seek.Firstly, the numbers continue to multiply. As the study points out: The fertiliser subsidy bill has escalated from Rs 500 crore in 1980-81, to more than Rs 6,000 crore by the mid-nineties and further to Rs 12,662 crore in 2004-05.’’If all this was going directly towards helping the poor and marginal farmers, it might still have been tolerable. But again, the report comes straight to the point when it says: ‘‘How much of the benefit of the subsidy is going to farmers rather than the producers of fertilisers have been matters of some debate.’’The study then proceeds to answer the question.Simply put, averaged out over the past 20 years, nearly 38 per cent of total subsidy has gone to the fertiliser industry and only the remaining 62 per cent has found its way to the farmers — mostly rich farmers.While the study does not give all the figures since the 1980s, a simple calculation shows that, going by this ratio, the fertiliser industry has been subsidised to the tune of more than Rs 50,000 crore from the nineties onward. To start with, the formula for giving out fertiliser subsidy is such that it rewards inefficiency. The government looks at two sets of numbers to decide on the subsidy. One is the price it fixes for the fertiliser and the other is the manufacturer’s cost plus margin. It pays the manufacturer the difference between the two.The problem is obvious. The more inefficient the manufacturer, the higher his cost, the greater the subsidy. Considering that imports of urea are still restricted, the study makes several significant points.It concludes that if the fertiliser sector were opened to imports, the gas-based plants would survive while the naphtha-based ones would not.It looks at the extreme scenario of completely phasing out fertiliser subsidy and not changing anything else. Foodgrain production could fall by 13.5 million tones. But it says that can be more than offset by improving irrigation and promoting the right mix of fertiliser nutrients. Of course, increasing procurement prices would be the easy way out, but even that may not be necessary, the study shows.The solution? Given the high foodgrain stock, instead of raising procurement prices a better option to offset the impact of higher urea prices would be to distribute coupons only to targeted households (small and marginal farmers) for fertiliser.The conslusion is clear. ‘‘Both farmers and the fertiliser industry have been subsidised. There is a need to reduce subsidy to both groups.’’
