Fertiliser Subsidy And Indian Farmer: How Does It Operate?

The government has recently cleared the dues of the fertiliser companies. This is being done by adding Rs 65,000 crore to an already existing subsidy regime of Rs. 71,309 crore. Clearing of dues would serve as a motivation for industries, especially given the upcoming production link incentive schemes by the Indian government. With a substantial amount of government subsidy going towards fertilisers, it is worthwhile knowing the entire process from supply to payment, and the lacunae therein.  

Subsidy as a concept originated during the Green Revolution of the 1970s-80s. Fertiliser subsidy is purchasing by the farmer at a price below MRP (Maximum Retail Price), that is, below the usual demand-and-supply-rate, or regular production and import cost. Fertiliser subsidy ultimately goes to the fertiliser company, even though it is the farmer that benefits. Before 2018, companies were reimbursed after the material was dispatched and received by the district railhead or designated godown.

2018 saw the beginning of DBT (Direct Benefit Transfer), which would transfer money directly to the retailer’s account. However, the companies will be paid only after the actual sale to the farmer. Currently, there are 2.3 lakh retailers across the country, attached to a Point of Sale (PoS) machine, which is in turn linked to Ministry of Fertiliser’s ‘E-Urvarak’ DBT channel. The retailers are reimbursed weekly, directly to their accounts.

A popular example of how this system works is that of the neem coated urea fertiliser. Its MRP (Maximum Retail Price) is fixed by the government at Rs. 5922.22 per tonne. The average cost of domestic production is at Rs 17,000 per tonne. The difference is footed by the centre in the form of subsidy. This fertiliser has high Nitrogen content and is cheaper than usual fertilisers. While this may be perceived as a good thing, excess of Nitrogen can disrupt the NPK (Nitrogen, Phosphorus and Potassium) balance in the soil.

The non-urea fertiliser is decontrolled or fixed by the companies. However, the government pays a flat per tonne subsidy to maintain the nutrition content of the soil, and ensure other fertilisers are economical to use. The non- urea fertilisers are further divided into two parts, DOP (Diammonium Phosphate) and MOP (Muriate of Phosphate). The former is priced at Rs. 10,231, while the latter is priced at Rs. 6,070 per tonne. While the famous “10:26:26” (specific ratio of NPK nutrients) fertiliser is at Rs. 8,380 per kilogram. They will cost Rs. 22,186 crores during the pandemic period.

The system before 2008 sounds fully functional. Why then did we have to alter it? The answer lies in fertilizer diversion, which usually happens with an under-priced product. Neem Coated Urea is one of the most popular fertilisers in India. It is diverted for non-fertiliser use, apart from being smuggled to Bangladesh and Nepal. Also, the central government is following a “no denial policy”, that is, anyone with a PoS machine can purchase the fertilisers in any quantity. While there is a limit of 100 bags one can procure at one time, there is no limit on the number of re-purchases. This further adds to the diversion.

Apart from the inefficient delivery of fertiliser, a bent towards Urea has had consequences. Increase in urea usage: per hectare usage, 24.9kg in the 1970s, to 137.6 kg of 2019, especially in Punjab and Haryana. While this will aid agriculture production and food security, it has repercussions for the stakeholders involved. The farmer, for example, will see a decline in soil productivity and profitability. The crops will become nonresponsive to fertiliser after a while. The soil chemistry will be negatively impacted. The ideal NPK ratio is 4:2:1, while the present ratio in Punjab and Haryana is 25:5:1!

The price of urea has gone up by only 11% between 2000 and 2020, while it has gone up by 150 to 300% for other fertilisers. In addition to heavy subsidy, low price inflation is also why farmers prefer Urea. The domestic urea production is uncompetitive; therefore we are increasingly importing urea. FY 2020 has dedicated 50,000 crores for urea subsidy indicating the inclination of the government to promote Urea.

A flawed subsidy policy is harmful not just for the farmer, but the environment as well. Indian soil has low Nitrogen use efficiency, which is the main constituent of Urea. Consequently, excess usage of contaminates groundwater. The bulk of urea applied to the soil is lost as NH3 (Ammonia) and Nitrogen Oxides. The WHO has prescribed limits been breached by Punjab, Haryana and Rajasthan. For human beings, “blue baby syndrome” is a common side ailment caused by Nitrate contaminated water. This hampers the ability of the body to carry Nitrogen, with a high probability of death.

To dissuade the farmer from excessive Urea use, earlier this year, Prime Minister Narendra Modi had urged farmers to significantly cut their use of urea to boost income and soil health and said the government is coming up with steps such as the ₹1 lakh crore agriculture infrastructure fund. “The agriculture infrastructure fund will provide better warehousing and cold storage facilities for farmers and is a step towards doubling of farm income,” Modi said. The fund is aimed to provide financial stability to the farmers, which will hopefully serve as a disincentive to overuse Urea.
India has a lot of damage control to do, given the repercussions of the Green Revolution of the 1970s. All is not lost if the farmers can be convinced to retract their steps.