Servicing Agriculture

That reform will lead to higher subsidy is wrong. It will pressure high-cost producers to modernise or shut down. Units must be allowed to modernise by de-bottlenecking to reduce costs and make fertiliser available

Rule-Based systems, relying on markets and well-defined intervention systems are increasingly there in the expanding services and manufacturing sectors, but not in agriculture. Here, we see imports at prices higher than local prices, seed markets throttled by 8216;regulators8217;, tariff policies subsidising industry and urban consumers and now fertiliser imports at higher than domestic costs and prices which will, perhaps, be used to later blame the farmer for higher 8216;subsidies8217;.

Finance, Planning, ERC, the Hanumantha Rao Committee and the Fertiliser Ministry all want reform. Twenty years ago, in 1985, the Long-Term Fiscal Policy Statement said: 8220;Fertiliser is an energy-intensive industry and studies show that energy consumption per unit of output varies widely among units of the same feedstock. The incentives to economise on energy are also weak in a pricing system where retention prices are determined plant wise.8221;

Twenty years ago, the path of reform was clearly outlined. It is said that reform is slow and sure. But how slow is slow? My senior Hanumantha Rao saheb is a generous man and in his published report, he says that in 1983, a committee on fertiliser pricing had set up a group under my chairmanship, with Bimal Jalan and Vijay Kelkar as members which had recommended 8220;group retention prices for naphtha, coal, gas, fuel oil/LSHS8221;.

8220;Long-term marginal prices were attempted for the new gas-based plants8221; and 8220;a uniform price for urea may be considered, after first moving over to group retention price to allow plants time to adjust8221;. So to begin with, like plants based on feedstock would compete and after an adjustment time, they would compete with imports. Costs vary with capacity utilisation, which is a management responsibility. Good plants would reorganise and compete and bad ones and those who won8217;t adjust would go to the wall. India had the capability to produce fertilisers in a competitive sequence and reform should consolidate that capability.

Why did fertilisers miss the bus in the first round of reform in the mid-eighties and later? First, the inefficient producers who would not adjust were politically powerful enough to scuttle the reform. A unit level pricing system gives them the scope to fix outcomes in their favour while a group-level system breaks the nexus between the price fixer and the industrialist, on a one-to-one basis. Second, politicians wanted to tell the farmer that they work for his interest and fight the 8220;robber barons8221; over their 8220;exploitation and profit8221;. The third reason is that nobody feels obliged to justify the details of the reform they talk about and an open democracy lets them do it. It is said that long-range marginal price means a very high price. This is not true. If the methods the 1985 Alagh Committee had worked out are modified, savings in energy costs can be upto Rs 2,000 crore annually. Inefficiency is a costly business.

This is a bad time on energy pricing and the market is distorted. Subsidies to the farmer will have to continue and energy pass-throughs implemented. That reform will lead to higher subsidy is wrong. It will pressure high-cost producers to modernise or shut down. Subsidy would be lower, because the high-cost group would then cease to exist.

Units must be allowed to modernise by de-bottlenecking, to reduce costs and make fertiliser available. The government can say that it won8217;t buy this and the industry should sell it in the open market, or produce new products or sell it back to the government at prices below import prices. Minor tinkering with the existing system is at worst retrograde and at best, the least possible disaster.