Consider a product, the price of which hasn't been revised for over eight years, and suddenly, one fine day, all controls are lifted. Well, that is roughly what has taken place in fertilisers. From March 2002 to March 2010, the maximum retail price (MRP) of urea stayed fixed at Rs 4,830 a tonne, while that of di-ammonium phosphate (DAP) and muriate of potash (MOP) remained at Rs 9,350 and Rs 4,455 a tonne respectively. Then came the decision that, starting from April 1, 2010, the prices of all fertilisers, barring urea, would stand decontrolled, with firms technically free to set their own MRPs.
In any normal product, this kind of situation would have prompted huge ‘catch-up' price corrections by manufacturers — the ones still in business. But in fertilisers, the difference was that firms continued to receive subsidies, now linked to the nutrient composition of the product. In return for these, they were informally told to keep price increases within ‘reasonable' limits and facilitate a smooth transition to an open pricing regime. The deal worked well initially, as the MRP of DAP, for example, was raised by Rs 600 during kharif 2010 and by another Rs 800 to Rs 10,750 a tonne the following rabi season. For the new 2011 kharif season, however, the hike has been to the tune of Rs 1,125, taking the MRP to Rs 12,000 a tonne, after adding the 1.03 per cent excise levied in the latest Budget. A not-so-pleased Department of Fertilisers has responded through a circular, stating that “companies have the freedom (sic) to increase the MRP of DAP by Rs 600” and even in other complex fertilisers, only “proportionate increases…would be admissible”. The industry obviously sees this as a return of price controls, even while it cites surging import costs of fertilisers and inputs as the reason for increasing MRPs beyond what the Centre deems appropriate.
All this should, nonetheless, not detract from the real issue, which is of inefficient and excessive fertiliser use. Between 2001-02 and 2009-10 — the period when MRPs were frozen — consumption of urea, DAP and MOP rose by 34 per cent, 70 per cent and 133 per cent respectively, whereas the corresponding growth in the country's three-year-average foodgrain output was just above 10 per cent. This clearly points to inefficient use — a result of distorted pricing that does not also factor in India's poor resource endowments for manufacturing fertilisers. While it is neither feasible nor desirable to eliminate these distortions at one go, the strategy of raising MRPs by a fixed amount every season may be worth persisting with. It would send the right signals, both to farmers (not to apply fertilisers arbitrarily) and the industry (to introduce customised, value-for-money nutrient products). Whether this happens through ‘perfect' or ‘dirty' decontrol — as seems to be the case now — matters the least.