End the oil, fertiliser subsidy raj

A likely trade deficit of around $200 billion during the current year ($110 billion during April-October 2012) — exceeding last year’s all-time record of $185 billion — is ringing alarm bells.

When viewed against the backdrop of deceleration in industrial output -- in particular, the capital goods sector -- this shows that excessive imports are being resorted to for supporting consumption, instead of growth.

Crude petroleum, fertilisers, edible oils, pulses, account for a major share of our import bill. Their imports remain high, irrespective of the prevailing international prices. Thus, even when prices shoot up, imports do not go down. We import 80 per cent of our crude requirement. In phosphate, this is 80-85 per cent; potash 100 per cent and urea 25-30 per cent. In edible oils and pulses, thanks to decades of neglect resulting in stagnating production, the situation is no better.

Ignoring market dynamics

Policy makers take demand as sacrosanct and the quantum that cannot be met from production is registered as ‘deficit’ to be met through imports. The designated state agencies are authorised to undertake imports from time to time.

Pricing and subsidy regimes are suitably dovetailed. Thus, sale price/MRP is controlled at a low level, supposedly keeping in mind what the consumer can pay. It bears no relation whatsoever to the cost of supply or market forces.

MRPs are guided by political considerations, ignoring economic logic. For urea and kerosene, these are kept frozen for years or even decades. This has led to excessive demand and gross neglect of use efficiency!

Under UPA-I, then Fertilisers Minister Ram Vilas Paswan lamented that efficiency of fertiliser use was just about 25-30 per cent. He exhorted farmers to use fertilisers more efficiently, little realising that the policy of keeping their price far below their cost (they pay a mere 25-40 per cent) was responsible for this.

At present, urea MRP is only 10 per cent higher than it was 10 years ago. And, this is despite inflation running into double digits for close to two years. The Fertilisers Minister does not want to hike it even by 1 per cent.

Left alone, such low prices shall not sustain. Why would producers/suppliers do business selling products at a fraction of their cost? So, Government reimburses the shortfall to them as subsidy.

Fertiliser (mis)use

This virtual immunisation of stakeholders, all in the name of helping the poor, has dangerous consequences for fiscal deficit, trade deficit and inflation — indeed, every indicator of the economy’s health. Analysing the soil health status of a farm, viz., how much of N, P & K it has, besides secondary and micro-nutrients, is a basic requirement to decide how much of these need to be supplied externally through chemical fertilisers. Yet, how many farmers get this done?

For the majority of our farmers, all this is ‘utopian’. Even the observance of a standard NPK use ratio of 4:2:1 is a far cry.

While deciding on application rate, they are guided overwhelmingly by the prices at which these are available. Thus, artificially low urea price has led to ‘too much’ use of ‘N’.

The imbalance in fertiliser use has led to worsening of soil health, diminishing returns and environmental spin-offs, threatening the sustainability of agriculture in areas that have come to be identified as grain bowls.

On a total urea consumption of around 30 million tonnes, even a 10 per cent saving (through better efficiency or avoiding waste) can lead to substantial import reduction, with a beneficial impact on trade deficit, subsidy and fiscal deficit. There is need to price urea so that farmers are sensitised to its true scarcity value. That should trigger the required adjustment in its use. The money thus saved can be used to moderate prices of P&K which have gone up 3-4 times since 2010.

For kerosene, diesel, LPG, etc, ‘efficient use’ is a phrase unknown to households; forget practising it.

LPG, diesel issues

Recently, the Government fixed an annual cap of six on LPG cylinders. This should meet a poor household’s fuel need provided there are no leakages and the consumer is aware of how to use LPG efficiently. He need not go for the seventh cylinder or beyond, which is available at double the price.

However, even before the ink ran dry, politics came into play. The powers that be are now veering round to increasing the cap to nine. And this may possibly be raised to 12 nearer Budget time. Can’t we show them the way to manage with less?

For diesel, brazen proliferation of cars — propelled by its low administered price — is vivid testimony of how callous policy makers could be towards conserving fuel and saving in subsidy. Excess contaminants in the air in New Delhi and other cities are other menacing outcomes.

The immunisation syndrome plays havoc with producers, too. This enables high-cost fertiliser units not to change (e.g., 4 million tonnes of urea capacity runs on naphtha and fuel oil); throttles competition in the oil sector and promotes inefficiencies and cost padding in the entire procurement and distribution chain.

Luckily, foreign capital inflows have thus far prevented our balance of payments (BoP) slipping into the danger zone, notwithstanding a high trade deficit. However, these can disappear in no time.

The very idea of the State giving food, fertilisers, fuel — indeed everything that a household needs — at throwaway prices is the root cause of our economic ills. Yet, political parties across the spectrum endeavour to win the heart of the public this way – and this way alone. Until this pattern is broken, our economy will not come out of the woods.

(The author is Executive Director, CropLife India, New Delhi. Views are personal)

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