Muddling along on fertiliser subsidies

Fertiliser subsidy was a problem when the Centre embarked on economic reforms in 1991.

Now, more than 20 years on, it remains an unresolved issue, with any attempt at reforms meeting the fate of straightening the dog’s tail. And each time, the prime stumbling block has been urea.

The first post-reform Budget of 1991-92 saw Manmohan Singh as Finance Minister announcing a 40 per cent hike in the maximum retail prices (MRP) of all fertilisers, including urea, di-ammonium phosphate (DAP) and muriate of potash (MOP).

But political opposition, including from within the ruling Congress party ranks, forced a partial rollback in less than a month’s time.

Singh’s 1992-93 Budget may have been a landmark one, but it refrained from touching fertiliser subsidy.

Moreover, on August 25, 1992, the urea MRP got rolled back further, to the extent it was now only 17 per cent more than the original pre-reform level.

Simultaneously, prices of all other fertilisers were decontrolled.

Blunder of being partial

This turned out to be a strategic blunder that the Centre was to repeat almost 18 years later.

The underlying political calculation behind it was that urea was the most widely consumed fertiliser.

It, therefore, made ‘partial decontrol’ the best way to rationalise subsidy without inviting farmers’ ire.

But the result was a skyrocketing of non-urea fertiliser prices. Between 1990-91 and 1993-94, the share of urea to total fertiliser consumption rose from 50-58 per cent, worsening an already skewed nutrient usage pattern. To minimise the above impact, the Centre started giving ad hoc concessions to manufacturers of decontrolled fertilisers, so that price increases could be kept within limits.

By the mid-nineties, however, the price differential between urea and other fertilisers had widened considerably.

In the rabi season of 2005-06, the MRPs of DAP and MOP touched Rs 10,250 and Rs 4,800 a tonne respectively, as against only Rs 3,320 for urea.

Ultimately, it led to the Centre, from 1997-98, going back to fixing prices of even non-urea fertilisers. While these remained ‘decontrolled’ in theory, the fact that release of subsidy was contingent upon companies selling the nutrients at the ‘indicative’ MRPs set by the Centre practically amounted to control.

This policy of de facto control was followed by the BJP-led National Democratic Alliance (NDA) government, with some notably failed attempts at restoring parity between urea and other fertilisers.

Rollback

In his 1998-99 Budget, Yashwant Sinha announced a urea MRP hike of Rs 1,000 a tonne.

Although sugar-coated with a lowering of prices of non-urea fertilisers, he was forced to roll back the increase to Rs 500 on the very same day (June 1) and to zero within two weeks.

Sinha’s successor, Jaswant Singh, similarly tried raising prices of urea along with other fertilisers in the 2003-04 Budget; he, too, had to beat a hasty retreat in a matter of days!

Then came the United Progressive Alliance (UPA), with Manmohan Singh himself as Prime Minister.

The first UPA Government did not even try to increase fertiliser prices: For more than eight years (from end-February 2002 to end-March 2010), they remained unchanged.

This stance proved fiscally costly. While neither the Congress under Narasimha Rao nor the NDA – apart from the short-lived Third Front administrations in between – made decisive moves to tackle the fertiliser subsidy, the overall bill was still kept within manageable limits.

Between 1990-91 and 2003-04, the subsidy fell from 0.75 per cent to 0.4 per cent of GDP.

But, thereafter, two things happened. The first was a farm sector recovery, which led to a spurt in overall fertiliser consumption. Farm-gate prices remaining the same only aided this further.

Second, the 2000s was witness to a global commodity price boom, extending to fertilisers as well.

With the UPA-1 Government deciding not to pass it on by adjusting domestic prices, the fertiliser subsidy bill zoomed to roughly Rs 97,000 crore or 1.7 per cent of GDP in 2007-08.

Partial decontrol by another name

When the UPA returned to power the second time round, the realisation that the subsidy needed fixing had clearly dawned.

But again, the Centre repeated the same blunder that it had committed in August 1992.

From April 1, 2010, a new nutrient-based subsidy (NBS) regime, as opposed to it being product-specific till now, was instituted. But again, it left out urea, with its farm-gate prices continuing to be administered by the Centre. The results of this are there to see.

Since the implementation of NBS, prices of DAP have soared more than two-and-half times and MOP nearly four times.

The MRP of urea has correspondingly gone up by hardly 11 per cent. In the process, the NBS, rather than improving the soil nutrient balance to correct for over-application of nitrogen, has only worsened it.

It remains to be seen whether the Finance Minister P. Chidambaram will seek to address it in the current Government’s last full Budget to be presented today.

>damodaran.h@thehindu.co.in

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