[Editorial Analysis] Reforming the fertilizer sector

Mains Paper 3: Economy
Prelims level: N:P:K
Mains level: Reasons and the impact of the high fertilizer subsidies in India

Context:

• Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill, promote the efficient use of fertilizers, achieve balanced use of N, P and K (nitrogen, phosphorus and potassium), and reduce water and air pollution caused by fertilizers like urea.

The History of Increase in subsidy:

• 1991: The prices of fertilizers were raised by 30% on average. The Economic Survey of 1991-92 noted that fertilizer prices remained almost unchanged from July 1981 to July 1991 and even with this 30% increase, fertilizer subsidy remained substantial and needed to be reduced further.

• Due to opposition to increase fertilizer prices, the increase in the price of urea was rolled back to 17% a year later over the pre-reform price.

This creates various challenges:

• Wrong composition of fertilizer being used: The high Urea subsidy has resulted in a big shift in the composition of fertilizers used in the country in favour of urea(N). The ratio of use of N:P:K increased from 5.9:2.4:1 in 1991-92 to 9.7:2.9:1 in 1993-94 as P and K are significantly costlier. Whereas the Ideal ratio is 4:2:1.

• Incentivizing incorrect proportion: Farmers tended to move towards balanced use, but policy and price changes reversed the favourable trend a couple of times in the last three decades.

• Uncontrolled increase in Urea subsidies: Over time, due to – 1) almost freezing the MRP of urea in different time periods and 2) its rising sale leading to an increase in indiscriminate and imbalanced use of fertilizers.

• Current Cost of Fertilizer subsidy: It has doubled in a short period of three years. For 2021-22, the Union Budget has estimated fertilizer subsidy at ₹79,530 crore (from ₹66,468 crore in 2017-18) but it is likely to reach a much higher level due to the recent upsurge in the prices of energy, the international prices of urea and other fertilizers, and India’s dependence on imports.

• Regional Disparities: In 2019-20, fertilizer use per hectare of cultivated area varied from 70 kg of NPK in Rajasthan to 250 kg in Telangana. This gap was much wider at the district level. Further, N,P,K ratio deviated considerably from the recommended or optimal NPK mix. It was 33.7:8.0:1 in Punjab and 1.3:0.7:1 in Kerala.

• Inter-state disparities: due to high variations in subsidy content, which is highly biased towards urea and thus nitrogen. As a result, the magnitude of fertilizer subsidy among the major States ranges in the ratio of 8:1.

• Serious fiscal challenges: High prices internationally also coincides with the peak demand for the Rabi season. In order to minimise the impact of rise in prices on farmers, the bulk of the price rise is absorbed by the government through enhanced fertilizer subsidy. This is likely to create serious fiscal challenges.

Impact of International Prices:

• Import dependence for P and K: The total demand for urea in the country is about 34-35 million tonnes (mln t) whereas the domestic production is about 25 mln t. The requirement of Diammonium Phosphate (DAP) is about 12 mln t and domestic production is just 5 mln t. This leaves the gap of nearly 9-10 mln t for urea and 7 mln t for DAP, which is met through imports. The use of Muriate of Potash is about 3 mln t. This is entirely imported.

• Price fluctuations in the international market: The international prices of fertilizers are volatile and almost directly proportional to energy prices. Besides, cartels of major global producers have a strong influence on prices. The taxpayers bear 78% of the cost of urea and farmers pay only 22%. This is expected to increase and is not sustainable.

Possible reforms:

• Demand to provide subsidies to organic fertilizers/biofertilizers: Concerned with the adverse environmental impact of certain chemical fertilizers, some sections of society suggest the use of organic fertilizers and biofertilizers instead.

• Nutrient Based Subsidy (NBS): The government introduced the Nutrient Based Subsidy (NBS) in 2010 to address the growing imbalance in fertilizer use in many States, which is skewed towards urea (N). However, only non-nitrogenous fertilizers (P and K) moved to NBS; urea was left out.

Way forward:

• In order to address the multiple goals of fertilizer policy, we need to simultaneously work on four key policy areas.

• Self-reliance and Import substitution: In this way, we can escape the vagaries of high volatility in international prices. In this direction, five urea plants at Gorakhpur, Sindri, Barauni, Talcher and Ramagundam are being revived in the public sector.

• Extend the NBS model to urea and allow for price rationalisation of urea compared to non-nitrogenous fertilizers and prices of crops. The present system of keeping the price of urea fixed and absorbing all the price increases in subsidy needs to be replaced by distribution of price change over both price as well as subsidy based on some rational formula.

• Develop alternative sources of nutrition for plants: Discussions with farmers and consumers reveal a strong desire to shift towards the use of non-chemical fertilizers as well as a demand for bringing parity in prices and subsidy given to chemical fertilizers with organic and biofertilizers. This also provides the scope to use a large biomass of crop and enhance the value of livestock by products. This would require innovations.

• Improving fertilizer efficiency through need-based use rather than broadcasting fertilizer in the field. The recently developed Nano urea by IFFCO shows promising results in reducing the usage of urea. Such products need to be promoted expeditiously after testing.

Conclusion:

• These changes will go a long way in enhancing the productivity of agriculture, mitigating climate change, providing an alternative to chemical fertilizers and balancing the fiscal impact of fertilizer subsidy on the Union Budgets in the years to come.

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Prelims Questions:

Q.1) With reference to the farm laws, consider the following statements:

1. The three farm laws are The Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020; The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020; and The Essential Commodities (Amendment) Act, 2020.

2. The implementation of these laws was stayed by the Supreme Court on January 12, 2021.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

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