The economic crisis in India’s South Asian neighbours has turned the spotlight on fiscal profligacy leading economies on the path to ruin. While this has sparked debate on our States doling out freebies and subsidies, the fact is that the Centre too has some soul-searching to do on this front. Even as the Modi government has kept a tight rein on expenditure, outlays on fertiliser subsidy have been galloping past Budget estimates by unacceptably large margins. After defraying over ₹81,000 crore on fertiliser subsidiy in FY20, Union Budgets for FY21 and FY22 sought to cap it at ₹71,309 crore and ₹79,529 crore respectively. But the revised estimates by year-end turned out 77-80 per cent higher than budgeted, at ₹1.28 lakh crore and ₹1.40 lakh crore respectively. For FY23, though the sowing season has just begun, the Centre has announced plans to augment its ₹1.05 lakh crore budget provision for fertiliser subsidies by another ₹1.1 lakh crore, taking the outlay to a record ₹2.25 lakh crore. This number overshadows food subsidy, projected at ₹2.06 lakh crore, and the ₹1.7 lakh crore outlay on Pradhan Mantri Garib Kalyan Yojana, which offered succour to the poor and marginalised through the pandemic.
It is wrong to fault the Centre for failing to foresee the escalation while framing its Budget, as exogenous events such as China’s export curbs and the Russia-Ukraine war have created supply bottlenecks that have led to an 80-100 per cent spiral in prices of fertilisers and their inputs in the past year alone. As fertiliser manufacturers in India are required to retail their products well below costs, the government ends up footing the bill for the gap to ensure uninterrupted supplies during the sowing season. But while no one could have foreseen the recent supply disruptions, successive governments at the Centre must certainly shoulder the blame for failing to summon up the political will to periodically peg up fertiliser selling prices so that the gap between realisations and costs could be narrowed, lightening the burden on the exchequer. It is striking that, with price hikes being put off for over a decade now, urea currently retails at one-tenth of its landed costs (₹300 per 50 kg against the cost of about ₹3,500), resulting in subsidies making up 90 per cent of production costs. Phosphatic and complex fertilisers, supposed to have been ‘decontrolled’ with the introduction of the Nutrient-Based Subsidy regime, are in an identical situation. With manufacturers asked to hold their price lines, over 65 per cent of Di-Ammonium Phosphate production cost is today subsidised.
Apart from burdening the taxpayer, subsidies of this order create other anomalies in the market — from diversion of subsidised products to industrial uses and imbalanced NPK use, to mounting arrears for producers, as the Centre delays pay-outs. Given India’s heavy reliance on imports for fertiliser inputs, there appear to be only two durable solutions to this problem. The Centre can initiate gradual inflation-linked price hikes on all fertiliser products so that the gap between costs and prices is narrowed if not bridged over time. Or it can make subsidy payments directly to farmers, bypassing the industry. The Centre’s successful rollout of the DBT model for Kisan Samman Nidhi and Ujjwala schemes should offer useful lessons on how fertiliser subsidies can be transitioned to this leakage-free mode.