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Fertilizer Subsidy – Issues & Reforms(GS 3 Mains)2020-21(UPSC)

Introduction 

Fertilizer use has seen rapid expansion and intensification in India and in other parts of the world with the spread of the Green Revolution technology. With the scope for raising production through the expansion of cultivable land exhausted, fertilizer will continue to play a key role in meeting the future requirement of food, feed, and fiber. Therefore it is important that fertilizer is used judiciously and optimally.

What is Fertilizer Subsidy?

  • Fertilizer subsidy is the difference between the holding price of fertilizers and the price at which fertilizers are made available to consumers.
  • For sustained agricultural growth and to promote balanced nutrient application, the fertilizers are made available to farmers at affordable prices.
  • Financial support is also given on both indigenous and imported urea.

Need

  1. In India per hectare Consumption around (around 146 Kg) is far lower than in developed countries.
  2. Indian Soils are deficient in Nitrogen and Phosphorus.
  3. Fertilizer can most effectively be used with ample water. So rainfed areas (deprived of irrigation) constitute 70 % of agricultural land and still, they use only 20% of national Fertilizers consumption. On the other hand, Rabi crops are dominantly produced in Irrigated areas, so they consume about 66% of fertilizers while their share of total agri output is 33%.
  4. India meets its 80 % requirement of Urea (N), while it is heavily dependent on Imports for its potassium (K) and phosphorus (P) fertilizer requirements.
  5. As per Eco Survey 2019 🡪 For the small and marginal farmers, the costs of fertilizers are key determinants of profitability of farming.

Present status

  • Fertilizer accounts for large fiscal subsidies (about 0.73 lakh crore or 0.5 % of GDP), the second-highest after food, according to Budget 2019-20.  
  • There are 3 basic types of fertilizer used– Urea, Diammonium Phosphate (DAP), and Muriate of Potash (MOP).
  • Of all the fertilizers, urea is the most produced (86%), the most consumed (74%), and the most imported (52 %).
  • Urea is the most physically controlled fertilizer, with 50% under the Fertiliser Ministry’s movement control order compared with 20% for DAP and MOP.
  • Urea also receives the largest subsidies, in outlay terms (accounting for nearly 70% of total fertilizer subsidy).
  • Per kg subsidies on DAP and MOP fertilizer are fixed– they do not vary with market prices. 
  • Imports of DAP and MOP are also not controlled.

How fertilizer subsidy is followed in India

  • A PoS machine is installed in every fertilizer godown. It captures the buyer’s identity based on Aadhaar biometric authentication, with the quantities purchased.

TWO PROPOSED MODELS

Two models of DBT are being considered to make fertilizer subsidy disbursal more targeted. 

  • Under the first, a ‘wallet’ will be created for each farmer where the subsidy amount will be deposited for release to the manufacturer or trader (in case of imported fertilizers) at the time of actual purchase
  • The other option is the farmer will pay the market price upfront and promptly receive the subsidy amount in his/her Aadhaar-linked bank account.

Govt policies

  • Nutrient Based Subsidy scheme 2010: applicable to 22 fertilizers (other than Urea) for which MRP will be decided to take into account the international and domestic prices of P&K fertilizers, exchange rate, and inventory level in the country. It aims to
    • ensure that an adequate quantity of P&K is made available to the farmers at a statutory controlled price.
    • ensure balanced use of fertilizers, improve agriculture productivity, promote the growth of the indigenous fertilizer industry, and to reduce the burden of subsidy. 
  • Neem Coated Urea (NCU): mandatory 100% production of NCU. Benefit includes- 
    • Slow down the dissolution of Urea into the soil, resulting into less urea requirement.
    • Stop the illegal diversion of urea for non-agricultural usages such as ingredients in the chemical industry, explosives, etc. 
  • New Urea Policy 2015: focusses on making the domestic urea energy efficient and reducing the subsidy burden. 
  • Gas Pooling: pooling of Domestic Gas with Re-Gasified LNG which is imported. This would help provide natural gas at a uniform delivered price to all-natural gas grid connected Urea manufacturing plants. 
  • Removal of minimum production criteria for manufacturers of Single Super Phosphate (SSP) making them eligible for subsidy irrespective of the quantity of SSP produced and selling for agriculture purposes. 
  • Soil Health Card: Farmers can get their own customized requirement of fertilizer in order to avoid irrational use of it. 

RECENT REFORM – Cabinet Committee on Economic Affairs has raised the subsidized prices of sulfur-based fertilizers

The move is aimed at discouraging the rampant use of NPK fertilizers, which impacts soil quality.

Issues and challenges

  1. Subsidy is paid to the companies only after the purchase of fertilizer by the farmer. In other words, the subsidy is still getting credited to the company and not the farmer. In that sense, it isn’t direct benefit transfer (DBT)
  2. Fertilizer subsidy has become a game of only three chemicals– NPK (nitrogen, phosphorus and potassium).
  3. There are huge discrepancies in the usage of fertilizer. In states like Punjab, the ratio of NPK usage is 61:19:1 against ideal 4:2:1
  4. In 1950, with the use of less NPK, the yield was more. Now, with the use of more NPK, lesser yield is being produced.
  5. The government is selling compost at a particular price and the same is the rate for urea so this would not push the farmers towards organic farming.
  6. These subsidies will only help fertilizer companies to sustain their business but in the long run, farmer input costs will continuously increase with inversely proportional output rates.
  7. Different inputs – urea, phosphatic and potassic fertilizers – have different rates of subsidies.
  8. It would be premature to accept that all the farmers would be able to buy their requirements of fertilizers at market rate and wait for 15 days or a month to get the subsidies.
  9. Fertilizers encourage urea overuse, which damages the soil, undermining rural incomes, agricultural productivity, and thereby economic growth.
  10. Fertilizer subsidies are generally criticized because they are perceived to be far from universally distributed and concentrated on relatively few producers, mainly large farmers.
  11. As per Economic Survey 2015-16:  Distortions in urea are the result of multiple regulations. These distortions feed upon each other and together create an environment that leads to a series of adverse outcomes. 
    1. Firstly, urea is only subsidized for agricultural uses. Subsidies like this violate the One Product- One Price principle. Black market effects are aggravated by further regulation- canalization
    2. Secondly, the black market hurts small and marginal farmers more than large farmers since a higher percentage of them are forced to buy urea from the black market. 
    3. Thirdly, some of the urea subsidy goes to sustaining inefficient domestic production instead of going to the small farmer. 
As per Economic Survey 2018-19 
Fertilizer response ratio is showing a declining trend.
  • This is an indicator of declining responsiveness of soil fertility to fertilizer application.
  1. Declining Response Ratio is due to,
    1. Inadequacy and imbalance in fertilizer use 
    2. Increasing multi-nutrient deficiency
    3. Lack of farmers awareness
    4. Balanced plant nutrition and poor crop managementFertilizer Subsidy

Way Forward & Suggestions

  • Subsidy should be linked to productivity which will remove fertilizer companies from the game.
  • The momentum for these changes has to be created through robust policies.
  • State Governments and Central Government need to work in tandem to encourage farmers for ecological farming. 

Particularly in western UP and Punjab, the farmers need to move away from wheat and rice because the groundwater has depleted.

  • Farmers have to be educated and taught to change their cropping pattern and move to multiple cropping.
  • To secure long term fertilizer supplies from locations where energy prices are cheap, it might be worth encouraging Indian firms to locate plants in countries such as Iran, following the example of the Fertiliser Ministry’s joint venture in Oman, which allowed India to import fertilizer at prices almost 50% cheaper than the world price.
  • Fertilizer is a good sector to pursue JAM because of a key similarity with the successful LPG experience: the center controls the fertilizer supply chain.
  • In order to address the distortions in urea-
    • Decanilising Urea imports which would increase the number of importers and allow greater freedom in import decision- would allow fertilizer supply to respond flexibly and quickly to changes in demand. 
    • Bringing urea under the Nutrient Based Subsidy program currently in place for DAP and MOP would allow domestic producers to continue receiving fixed subsidies based on the nutritional content of their fertilizer. 

Suggestions-based on NITI Aayog Strategy

  • Strengthen the SHC scheme to ensure SHC based fertilizer distribution at the ground level. 
  • Seed SHCs with the integrated fertilizer management system. 
  • Ensure proper functioning of the SHC labs.
  • Link SHCs with Kisan credit cards and make SHCs mandatory for subsidies
  • Reorient fertilizer subsidy policy to bring secondary and micronutrients on the same nutrient-based subsidy (NBS) platform as phosphorus (P) and potash (K).
  • Subsidies on liquid fertilizers to encourage fertigation with micro-irrigation.
  • The fertilizer sector should procure compost produced out of organic waste.
  • Upfront subsidy per acre of land through Direct Benefit Transfer instead of providing separate subsidies for fertilizers, electricity, crop insurance etc. 
As per Economic Survey, 2019  Suggested Measures are,
    • Use of optimal dose based on soil health status
    • Promotion of neem-coated urea
    • Promotion of micronutrients
    • Promotion of organic fertilizers
    • Promotion of water-soluble fertilizer
    • Paramparagat Krishi Vikas Yojana (PKVY) and Rashtriya Krishi Vikas Yojana (RKVY) scheme .
    • Models like Natural Farming, Vedic Farming, Cow Farming, Homa Farming, Zero Budget Natural Farming (ZBNF) .

PRACTICE QUESTION

Fertilizers overuse damages the soil, undermines the rural incomes, agricultural productivity, and thereby economic growth. Reform of the fertilizer sector would not only help farmers and but also improve efficiency in agriculture in the sector. Critically analyze (15 Marks, 250 Words).

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