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Published on: Aug. 26, 2022, 1:40 p.m.
Ballooning fertiliser subsidy
  • Outlays on fertiliser subsidy have been galloping past budget estimates

By Rakesh Joshi. Executive Editor, Business India

Though the Modi government has kept a tight rein on expenditure, outlays on fertiliser subsidy have been galloping past budget estimates by unacceptably large margins. There is a growing view among economists that the finance ministry should pay more attention to fertiliser subsidy. While the economic crisis in our neighbouring countries has turned the spotlight on fiscal profligacy, leading economies on the path to ruin and 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. 

After defraying over Rs81,000 crore on fertiliser subsidy in 2019-20, Union budgets for 2020-21 and 2021-22 had sought to cap it at Rs71,309 crore and Rs79,529 crore respectively. But the revised estimates by year-end turned out 77-80 per cent higher than budgeted, at Rs1.28 lakh crore and Rs1.40 lakh crore respectively. For 2022-23, though the sowing season has just begun, the Centre has announced plans to augment its Rs1.05 lakh crore budget provision for fertiliser subsidies by another Rs1.1 lakh crore, taking the outlay to a record Rs2.15 lakh crore.

Now, there are reports that the government may have to further revise the budget estimate (BE) for fertiliser subsidy in the current fiscal year by about 140 per cent to Rs2.5 lakh crore, as elevated global prices of fertilisers and natural gas, the key feedstock, have inflated costs. This will be the largest ever outlay for fertiliser subsidy.

The amount even overshadows food subsidy, projected at Rs2.06 lakh crore, and the Rs1.7 lakh crore outlay on Pradhan Mantri Garib Kalyan Yojana, which offered succour to the poor and marginalised through the Covid pandemic.

It would be 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 retails at one-tenth of its landed costs today (Rs300 per 50 kg, against the cost of about Rs3,500), 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 (NBS) 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

No burden to farmers

Mansukh Mandaviya, Union minister for chemicals & fertilisers, has recently stated that the government would not pass on the burden of rise in global prices to farmers. The government has been raising the subsidy on urea in tandem with the increase in costs, as the retail prices of the nutrient are fixed.

The government had, in April, increased the NBS-based subsidy rates for phosphatic and potassic fertilisers for the kharif season (from 1 April 2022 to 30 September 2022), in view of the increased cost of imports. The minister’s statement signals that the NBS rates will be hiked further in the October review.

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. 

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