An Analysis of Fertilizer Subsidy Regimes in India

Seminar Teachers: Dr. T.N. Prakash Sri. P.S. Srikantamurthy By: Arun, M., PAK 9001/0008 II Ph.D., 2ND Seminar

Scheme of presentation

Introduction World Fertilizer Market & Prices Pricing Policy Framework and Reforms Indias Position in World Markets Rising Fertilizer Subsidies the Beneficiaries Equity Issues in the Distribution of Fertilizers Nutrient based fertilizer Subsidy in India Price Sensitiveness of NBS Policy on Fertilizer Consumption Conclusions & Policy Implications
2

Introduction

Production and Market support to the farmers. Production: Improved & HY varieties are continuously being developed, R&D in all the departments are funded and promoted. Market: Contract farming, futures trading and insurance, apart from fertilizer, water, power and credit subsidies provided.
3

Fertilizers- the key inputs

Fertilizers, the key inputs in agriculture, ever since HYVs are introduced. Boosts agriculture production with key components of N, P & K apart from other minor nutrients.

Source both domestic production and imported

4

World Market

price determination in any industry - In perfect markets, prices will be determined by the forces of supply and demand, but the international fertilizer market is not a perfect market. The production, demand and supply are concentrated in a few nations of the world and the prices are in their control.
5

Table 1: Concentration of World Fertilizer Production, Consumption and Trade (2007-08)

Product/ Nutrients Consumption N P K N+P+K Production N P K N+P+K China (26.9%), India (8.8%), Russia (7.7%), US (6.0%), Indonesia (3.6%) US (21.0%), China (18.5%), Morocco (8.4%), Russia (7.4%), India(5.5%) Canada (39.6%), Russia (12.7%), Belarus (11.1%), Germany (8.7%), US (5.6%) China (24.3%), Canada (10.4%), Russia (9.7%), US (9.5%), India (7.6%) -61.5% 66.6 73.8 95.0 75.9 China (34.8%), India (15.5%), US (12.4%), Pakistan (2.8%), Indonesia (2.8%) China (31.5%), India (15.8%), US (11.3%), Brazil (9.7%) Pakistan (2.7%) China (24.0%), US (17.3%), Brazil (15.2%) India (9.8%), Malaysia (3.9%) China (32.2%), India (14.6%), US (13.0%), Brazil (6.5%), Indonesia (2.5%) - 68.8% 78.9 80.3 81.3 78.1 Countries % Share of Top 10 in World

Contd..
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Exports Urea Ammonia China (16.1%), Russia (12.7%), Saudi Arabia (9.4%), Ukraine (9.3%), Qatar (7.7%) -55.2% Trinidad (25.2%), Russia (18.7%), Ukraine (7.6%), Indonesia (7.3%), Canada (5.1%) -63.9% 77.0 81.1

MAP and DAP

Potash

and US (33.8%), China (21.1%), Russia (19.2%), Morocco (9.0%), DAP Tunisia (5.3%) -88.4%
Canada (38.6%), Belarus & Russia (36.3%), Germany (11.2%), Israel (7.6%), Jordan (3.7%) 97.4% India (18.0%), US (17.5%), Brazil (6.1%), Thailand (4.9%), Turkey (4.4%) -50.9% US (40.5%), India (9.2%), Korea Republic (5.7%), France (4.3%), China (3.9%) -63.6% India (15.5%), Brazil (15.1%), Pakistan (7.6%), Argentina (6.6%), Canada (4.5%) -49.3% China (15.1%), US (12.7%), Brazil (11.5%), India (6.4%), Malaysia (2.9%) -48.6% Source: Sharma, V.P., and Thaker, H., 2010

98.8
100.0

Imports
Urea Ammonia MAP and DAP Potash 64.8 77.4 66.4 57.7
7

Table 2: Market Power of Top Five Global Fertilizer Companies

Company Market Power Nitrogen (N) Phosphate (P) Potash (K)

Yara (Norway)
Mosaic (US) Agrium (Canada) PotashCorp (Canada)

++++
++ +++ ++

++
++++ ++ ++

+
+++ ++ ++++

Note: ++++ very strong presence; +++ strong; ++ low; + no market presence. Source: Sharma, V.P., and Thaker, H., 2010 Yara: 8 mT ammonia, 6 mT Nitrate Mosaic: 9.4 mT-Phosphate (larger than aggregate of next 3 largest producers) 2nd largest in Potash -10.4 mT

Top 5 producers produced - 22% in 2002; 33% in 2007

Table 3: Trends in International Prices of Urea, DAP and MOP ($/Ton Product Bulk, January 1990 September 2008)
Product Minimum Maximum Average Coefficient of Variation (%) 63.5 83.6 70.7 CAGR (%/ Annum) 2.64 2.77 2.46

Urea (fob Middle East)

70(JulyDec 1998)

865(JulySep 2008)

200

DAP (fob US, 110 (Jan1,230(Apr- 270 Gulf) June 1993) June 2008) MOP (fob Vancouver) 80 (Jan945 (JulyJune 1993) Sep 2008) 160

Source: Sharma, V.P., and Thaker, H., 2010 Urea: Average FOB price during the decade of 1990s $135; decade of 2000- $260/ton. DAP: Average FOB price during the decade of 1990s $177; decade of 2000- $422/ton MOP: Average FOB price during the decade of 1990s $111; decade of 2000- $288/ton
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Pricing Policy - India

Fertilizer Control Order 1944; made effective from 1957. This enabled Govt. to statutorily fix & control fertilizer prices. Selling price Cost of production and distribution was paid to the manufacturers = Subsidy. Determining the extent of such amount assumed the name Retention Price and Subsidy Scheme (RPS) in 1977.
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Objective of RPS

To encourage domestic production of of fertilizers by ensuring a reasonable rate of return on their investment. Initially it covered domestic production of urea, AS, & CAN. In 1979, the RPS was extended to cover P fertilizers. The same year the equated freight scheme was introduced to ensure an even distribution of fertilizers in the country. The Retention Price Scheme, as recognized by many, as 'proving and claiming of costs' rather than controlling them.
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Committees suggesting Reform

1976: Fertilizer Prices Committee (FPC) under S. S. Marathe

to suggest a policy of fertilizer pricing that would give manufacturers, a sustained fair return on their investment; and to develop norms for calculating costs and retention prices of various products and based on different feedstock. Suggestion: rather than cost-plus formula, retention prices should be based on certain norms of input consumption and capacity utilization. So, FPC recommended a group-wise scheme. However, the government chose to introduce the RPS as a unit-wise scheme. Recommended the use of group retention prices and an eventual transition to a uniform price over a period of time. The Committee also suggested a tariff adjusted import parity price for new gas-based plants. Its recommendations were, however, rejected by the government.
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1986: High Powered Committee of Secretaries on RPS -B. Singh

1987: High Powered Committee on Fertilizer Consumer Prices . Suggested an increase in the farmgate prices of fertilizers by 5-7 per cent if the cumulative growth in fertilizer consumption is more than 30 per cent in three years. These were again turned down by the government. August 1992, the JPC stated that the RPS provided no incentive to fertilizer plants to optimize capital costs of plants. In particular, the Committee suggested that a cut off point of 110 per cent capacity utilization should be fixed for capital-related charges for gas-based nitrogenous plants. This was never put into practice. A committee of experts to review the RPS - Hanumantha Rao Committee on fertilizer pricing was constituted as a result of JPC report.

13

Price increase and uproar

July 1991: Government tried to raise urea price by 40 percent (from Rs. 2350 per tonne to Rs 3300 per tonne). fertilizers with lower nitrogen content than urea and DAP, including AS, CAN and ammonium chloride were decontrolled. August 1991: because of political uproar, urea price was reduced to Rs 3060 per tonne, making the effective increase only 30 per cent. August 1992: JPC recommended decontrol of P & K fertilizer prices and reducing urea price by 10 per cent. On 25 August 1992: Decontrolled P & K sector. P and K fertilizer prices shot up by more than 100 per cent while the urea price came down to Rs. 2760 per tonne. To contain the rising prices of P and K fertilizers, the imports of DAP were decanalized in September 1992 and their imports were placed under the Open General License.
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As a result of unrestricted imports of DAP, 8 out of 11 plants in the country had almost come to a grinding halt. In response to the industry protest, the government introduced a flat rate subsidy of Rs 1000 per tonne on DAP and MOP in September 1992. The RPS did achieve its objective of developing a large domestic industry, achieving near selfsufficiency in fertilizer production and increasing consumption of chemical fertilizers but was criticized of promoting inefficiency, leading to a huge burden of subsidies.
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High Powered Fertilizer Pricing Policy Review Committee - C.H. Hanumantarao

Accused RPS policy of providing for over capacity utilization, thus accumulated capital costs being transferred to govt. through subsidy. Promotes low cost, inefficient old units and hurdles, new, high cost, efficient ones. Suggestion: shift to cheaper raw material to keep the cost of production low, like from naptha to gas, coal, fuel oil, etc., Phased deregulation of fertilizer sector promote technological and managerial innovations. No uniform price for urea. Pricing methodology followed for urea should be extended to DAP also.
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A phased programme for attaining total decontrol

Phase-I : 2000 2001 and 2001-2002
Increase in the price of urea at regular intervals

Improvement in the implementation of the concession scheme

17

17

Decision on fertilizer pricing policy

Urea, being the only fertilizer under statutory price, distribution and movement control, is covered under (RPS).
Recommendation: dismantling of RPS and adoption of a uniform Normative Referral Price (NRP). The natural gas based units, the naphtha and LSHS/Fuel Oil based units would get a feedstock cost differential reimbursement on account of their higher feedstock prices for a period of 5 years during which they would be expected to switch over to LNG which is the cheapest and most efficient feedstock.

18

18

Phase-II (2002-03 2003-04)

Creation of new capacities - Long term perspective protection to indigenous industry Phase-III (2004-05 2006-07) Withdrawal of the MRP and Concession Scheme: Total decontrol with a view to allow operation of free market forces could be introduced during the year 200506. The emphasis will be only on structural improvements in the agricultural sector and improvement of the non-farm rural sector. The concession scheme, extended to urea in Phase-II, will have to be withdrawn in Phase-III. The scheme can perhaps be withdrawn by the end of the year 2007 and 19 thereafter the market forces will have a free play.

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April 2003: New Pricing Scheme (NPS) for urea units was implemented in a phased manner, with an objective to bring transparency, uniformity, efficiency, and reduce the cost of production. This seems to have reduced the quantum of fertilizer subsidy amounts during 2002-03 and 2003-04. Based on the recommendations of Export Group on P & K fertilizers, a policy for these products was implemented.

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Table 4: Fertilizer Consumption, Production, Imports and Subsidies in India

(lakh tons, Crore Rupees)
Consumption Production Imports
Fertilizer Subsidie s (@9394 & 9900 series)

Years 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97

N 80.46 84.26 87.88 95.07 98.23 103.01

P 33.21 28.43 26.69 29.32 28.98 29.77

K 13.61 8.84 9.09 11.25 11.56 10.3

Total 127.28 121.53 123.66 135.64 138.77 143.08

N 73.01 74.3 72.31 79.45 87.77 85.99

P 25.62 23.06 18.16 24.93 25.58 25.56

K 0 0 0 0 0 0

Total 98.63 97.36 90.47 104.38 113.35 111.55

N 5.66 11.56 15.88 14.76 19.93 11.71

P 9.67 7.38 7.22 3.8 6.47 2.55

K 12.36 10.82 8.57 11.09 13.15 6.07

Total 27.69 29.76 31.67 29.65 39.55 20.33

5,185 5,796 4,562 5,769 6,735 7,578

1997-98
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

109.01
113.54 115.92 109.2 113.1 104.741 110.77 117.139 127.233 137.729 144.191

39.14
41.12 47.99 42.15 43.82 40.19 41.24 46.24 52.03 55.43 55.15

13.73
13.32 16.78 15.67 16.67 16.01 15.98 20.61 24.13 23.35 26.36

161.88
167.98 180.69 167.02 173.59 160.94 167.99 183.98 203.4 216.51 225.7

100.86
104.8 108.9 109.61 107.68 105.62 106.34 113.33 113.54 115.77 108.99

29.76
31.41 33.98 37.43 38.6 39.06 36.31 39.97 42.21 45.17 38.06

0
0 0 0 0 0 0 0 0 0 0

130.62
136.21 142.88 147.04 146.28 144.69 142.65 153.3 155.75 160.94 147.06

13.62
6.35 8.33 1.64 2.83 1.35 2.05 4.13 13.9 27.04 NA

6.72
9.68 15.34 4.37 4.94 2.28 3.72 3.07 11.45 13.73 NA

11.4
15.42 16.48 16.27 16.97 15.68 15.53 20.58 27.64 20.76 NA

31.74
31.45 40.15 22.28 24.74 19.31 21.3 27.78 52.99 61.53 NA

9,918
11,596 13,244 13,800 12,595 11,015 11,847 15,879 18,460 26,222 32,490
21

Sources: Compiled from Department of Agriculture, Department of Fertilizers, GOI.

Figure 1: Trends in Fertilizer Production and Consumption in India (1950-51 to 2007-08)

Source: FAI, 2008

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Table 5: Major Subsidies in India: 1990-91 to 2008-09

Year 1990-91 (% to total subsidy) 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Food 2,450 (20.15) 2,850 2,800 5,537 5,100 Indigenous Urea 3,730 (30.68) 3,500 4,800 3,800 4,075 4,300 4,743 6,600 7,473 8,670 9,480 8,044 7,790 Imported Urea 659 (5.42) 1,300 996 762 1,166 1,935 1,163 722 333 74 1 47 Decontrolled Fertilizers 500 1,672 2,596 3,790 4,500 4,319 4,504 3,225 528 Total Fertilizers 4,389 (36.10) 5,185 5,796 4,562 5,769 6,735 7,578 9,918 11,596 13,244 13,800 12,595 11,015

(crore rupees)
Total Subsidies 12,158 (100.00) 12,253 11,605 11,854 12,666 15,499 18,540 23,593 24,487 26,838 31,210 43,533 11,995

5,377 6,066 7,900 9,100 9,434 12,060 17,499 24,176

2003-04
2004-05 2005-06 2006-07 2007-08 2008-09 (RE) (% to total subsidy)

25,181
25,798 23,077 24,014 31,328 43,627 (33.76)

8,521
10,243 10,653 12,650 12,950 16,517 (12.78)

494 1,211 3,274 6,606 10,981 (8.50)

3,326
5,142 6,596 10,298 12,934 48,351 (37.41)

11,847
15,879 18,460 26,222 32,490 75,849 (58.69)

44,323
45,957 47,522 57,125 70,926 1,29,243 (100)
23

Source: Sharma, V.P., and Thaker, H., 2010

CAGR: 16.9%

CAGR: 12.9%

Figure 2: Trends in Food and Fertilizer Subsidies in India.

Source: Sharma, V.P., and Thaker, H., 2010

Food Subsidy: 0.41% to 1.02% of GDP Fertilizer Subsidy: 0.9% to 1.5% of GDP

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Why fertilizer Subsidy and its rationalization?

to provide fertilizers at stable and affordable prices & increase agricultural production through higher fertilizer use, and to encourage domestic production by allowing fertilizer producers a reasonable return on their investments. Thus benefiting both the groups, producers and the consumers. The high figures of fertilizer subsidy and its high share in total subsidies, speaks the need for the rationalization of subsidy regime in the country. Having given sufficient time for the domestic industries, it is time now to rationalize the subsidies.

25

Before making any changes in subsidy policy.

Policy makers need to first determine the actual beneficiaries and where the burden of adjustment would fall, if one were to phase out fertilizer subsidy. Efficiency of Indian fertilizer industry vis-a-vis imported fertilizers. Pertinent to urea segment of fertilizer industry as it was under the RPS and urea imports remain 'canalized'. Finally, what would be the impact on agricultural production if one were to reduce/abolish fertilizer subsidies?
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Table 6: Farmers Share in Fertilizer Subsidy

Particular TE 83-84 258 -347 438 TE 86-87 590 243 512 TE 89-90 700 93 1037 TE 92-93 2002 231 1212 TE 95-96 3669 -562 786 TE 98-99 3033 1701 2639 1999-00 2000-01

Per ton subsidy going to farmers on IPP basis

Urea (Rs./ton) DAP (Rs./ton) MOP (Rs./ton) 1098 2330 4042 2269 1128 3885

Total subsidy on (N+P+K) (Rs. Million) [per ton subsidy X consumption]

Fertilizer subsidy as per budget (Rs. Million) Share of budgetary subsidy going to farmers

1654

8424

17616

37772

69779

87029

61218

81266

6740

19160

33187

49950

54587

96973

132440

126510

24.54

43.97

53.08

75.62

127.83

89.75

46.22

64.24

27

Source: Gulati, A., and Narayanan, S., 2002

Indias Position in World Markets

Source: FAI, 2008

28

Figure 4: Imputed Subsidy per ton of Urea Imported and Indigenously produced

Source: FAI, 2008

During 9 out of 13 years, imported subsidy figures higher than that of indigenous production

29

Figure 5: Share of Imported and Indigenous Urea in Total Subsidy on Urea

Source: FAI, 2008

International Prices of Urea were not always lesser than that of domestic production

But we cannot say domestic production of urea is efficient Natural Gas is efficient, Naptha, FO/LSHS, Mixed Feed Stock attract more subsidy due to their relative less efficiency in production.

30

Figure 6: Natural Gas allocation for Fertilizer and Energy Sectors (%)

Source: FAI, 2008

Gas as feed stock in fertilizer production accounted for about 50% during 2001-02 2006-07: supply shortfall of 24.8%, hence the rest was met through other feed stock source

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Pattern of Fertilizer Consumption by Farm Size Table 7: Pattern of Fertilizer Consumption by Farm Size in India
Year Marginal (<1 ha) Small (1.0-2.0 ha) Semi-medium (2.0-4.0 ha) Medium (4.0-10.0 ha) Large (>10 ha) All Households Distribution of holdings (%) 1996-97 2001-02 1991-92 1996-97 2001-02 1991-92 60.7 64.0 17.3 19.0 22.3 63.6 18.9 18.2 19.6 19.1 20.3 62.6 12.5 11.0 23.8 23.5 22.8 60.9 6.5 5.6 25.8 25.1 22.9 58.0 1.4 1.2 13.5 13.3 11.7 46.9 100.0 100.0 100.0 100.0 100.0 59.1

Share in gross cropped area (%)

Proportion of fertilized area to gross cropped area (%)

1996-97
2001-02 1991-92 1996-97 2001-02

64.1
77.1 20.6 25.6 29.9

62.7
74.2 21.1 20.4 22.1

60.8
71.3 24.2 23.0 22.1

57.4
65.1 23.9 22.2 18.9

45.0
49.7 10.2 8.8 7.0

58.8
69.2 100.0 100.0 32 100.0

Share in total fertilizer consumption (%)

Source: Sharma, V.P., and Thaker, H., 2010

1991-92

57.1

20.3

13.7

7.3

1.6

100.0

Table 8: Pattern of Fertilizer Use Intensity by Farm Size in India

Year Marginal Small SemiMedium medium Large
All Househol ds 60.7 77.1 92.6

Fertilizer consumption per hectare of gross cropped area (kg) 1991-92 1996-97 2001-02 72.2 103.8 126.2 65.5 82.6 100.6 61.7 75.3 88.8 56.3 68.1 75.8 46.0 51.1 55.9

Fertilizer consumption per hectare of fertilizer area (kg)

1991-92 1996-97 2001-02 113.4 162.1 164.7 104.6 131.8 134.7 101.3 123.9 122.8 97.0 118.6 113.3 98.1 113.6 108.4 102.8 131.1 131.7 33

Source: Sharma, V.P., and Thaker, H., 2010

Table 8: State-wise Fertilizer Use /Hectare of Gross Cropped Area by Size of Holding: 2001-02
States Andhra Pradesh Assam Gujarat Haryana Marginal 171.1 50.4 104.1 145.1 Small 149.0 29.9 83.0 126.0 Semi-medium 139.0 24.4 72.8 132.6 Medium 128.1 16.1 59.0 132.1 Large 109.6 3.8 40.4 118.5 All 146.7 30.7 70.0 130.7

Himachal Pradesh
Jammu and Kashmir Karnataka Kerala

61.6
159.4 172.0 180.8

55.9
71.6 122.5 104.6

52.3
62.4 98.5 108.3

47.3
39.2 79.9 121.2

38.9
30.4 62.2 131.5

55.4
107.9 105.1 152.0

Madhya Pradesh
Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal All India

44.1
143.2 65.0 163.3 69.3 173.8 120.4 130.2 126.2

33.5
109.8 56.4 164.3 46.9 140.6 109.3 137.5 100.6

29.3
92.6 55.8 166.7 41.9 137.4 104.5 139.2 88.8

27.0
82.8 60.2 169.5 33.4 128.6 95.0 107.5 75.8

24.4
63.8 63.8 169.9 16.3 90.2 83.5 112.3 55.9

30.0
101.1 59.1 168.6 32.6 148.6 109.9
34 133.0

92.6

Source: Sharma, V.P., and Thaker, H., 2010

State wise share in fertilizer subsidy

N state-wise Consumption of urea * weighted average subsidy on imported and indigenously produced urea (Rs./tonne). P&K state-wise subsidies varied, so amount of subsidy was not matching the total subsidy on them, reported in budget. So, per unit subsidy on P&K = (tot subsidy/tot consumption during that year)*tot consumption in the state in the year. Implies, subsidy is in proportion to the consumption

35

Table 10: Share of Major States in Total Fertilizer Subsidy in India, 1992-93 (in %) to 2007-08
State Uttar Pradesh Andhra Pradesh Maharashtra Madhya Pradesh Punjab Gujarat Karnataka West Bengal Bihar Haryana Tamil Nadu Rajasthan Orissa Assam Kerala Others Jammu and Kashmir 1992-93 23.2 10.6 8.5 6.2 11.6 5.5 4.2 5.2 6.0 5.8 5.0 4.2 1.6 0.2 0.7 0.9 0.4

Sum 60

1999-2000 19.5 10.8 10.3 6.6 8.6

Sum 55.8

2007-08 17.5 11.3 10.2

Sum 54.5

7.7

31.7

5.2 6.2 6.7 5.8 5.3 5.4 4.7 2.0 0.6 1.0 0.5 0.4

34.6

7.0 6.5 6.4 6.2 5.5 4.8 4.4 1.9 1.0 0.9 0.4 0.4

36.4

Himachal Pradesh

0.3

0.2

0.2

36

Source: Sharma, V.P., and Thaker, H., 2010

7.8

Table 11: State-wise Trends in Intensity of Fertilizer Subsidy (Rs/ha of GCA)

States Punjab Andhra Pradesh Haryana Tamil Nadu West Bengal Uttar Pradesh Bihar Gujarat Karnataka Maharashtra Jammu and Kashmir Kerala Madhya Pradesh Assam Himachal Pradesh Orissa Rajasthan India 1992-93 946 512 607 430 373 553 394 304 207 247 242 150 159 35 170 102 129 331 1999-2000 1,454 1,096 1,164 1,104 931 981 774 651 682 637 457 455 334 206 277 314 322 703 2007-08 3,924 3,561 3,476 3,307 2,660 2,617 2,432 2,301 2,107 1,829 1,264 1,235 1,213 1,143 958 894 824 2,083
37

Source: Sharma, V.P., and Thaker, H., 2010

Figure 8: Percentage area treated with fertilizers on Irrigated and Un-irrigated land

Source: Sharma, V.P., and Thaker, H., 2010

38

Figure 9: Changes (%) in share of irrigated and un-irrigated areas in consumption of fertilizers between 1996-97 and 2001-02.

Source: Sharma, V.P., and Thaker, H., 2010

39

Figure 10: Trends in Consumption of fertilizers (N+P+K) on irrigated and un-irrigated land (kg/ha)
15% increase

42% increase

40

Table 12: Concentration of Fertilizer Subsidy on Major Crops in India: 2001-02

Crop Paddy Total Fertilizer Used (000 Tons) 5,061.7 Total Subsidy (Rs Lakh) 367.5 % Share in Total Subsidy 32.2 Per Ha Fertilizer Use (Kg) 119.4

Wheat
Sugar cane Cotton Groundnut

3,189.7
989.6 921.0 465.9

231.6
71.8 66.9 33.8

20.3
6.3 5.9 3.0

130.8
240.6 110.8 74.6

Jowar
Bajra Maize Others All crops

443.8
304.3 258.4 4,073.4 15,707.8

32.2
22.1 18.8 295.7 1140.4

2.8
1.9 1.6 25.9 100.0

60.0
29.0 55.8 66.1 92.6
41

Source: Sharma, V.P., and Thaker, H., 2010

Why alternative policy?

In last few years, the marginal response of agricultural productivity to additional fertilizer usage, has fallen sharply. Imbalanced NPK application, rising multi-nutrient deficiency and lack of application of organic manures, leading to reduction in carbon content of the soil, has contributed towards the stagnating agricultural productivity. Subsidy leads to lack of innovation in fertilizer sector, leading to, very few products being introduced by fertilizer companies. The fertilizer industry suffers from low profitability and works in a highly regulated environment. Virtually no investments for the past 11 years in urea sector and for over 8 years in P&K sector. Subsidy outgo of Government has increased exponentially by 530% during 2004-2009 (94% due to - international prices of fertilizers and fertilizer inputs, and only 6% -attributable to increase in 42 consumption.)

Options considered before finalizing NBS

Option 1:

Open MRP for all fertilizers Subsidy on Feed Stocks like NG for Urea units in proportion to the desired MRP of fertilizers
Open MRP for all fertilizers Fixed subsidy to industry for each of the six groups of Urea manufacturers. Fixed Nutrient Based Subsidy with open MRP Strengthen infrastructure for direct payment of subsidy to farmers. Open MRP for all fertilizers Fixed subsidy based on the proposal put forth by PricewaterhouseCoopers.

Option 2:

Option 3:

Option 4:

43

Nutrient based fertilizer Subsidy in India

It would be difficult to ensure that direct transfer of subsidy to millions of farmers is actually used by farmers, for only buying fertilizer and there are no leakages in the transfer of subsidy. Adversely effect agricultural production in the country. Using existing mechanism ensures usage of fertilizers by all categories of farmers. So, direct transfer of subsidy to farmers may not a right policy decision at this point of time. NBS acts as intermediary arrangement in fertilizer subsidy policy, until necessary infrastructure is created. Intends to ensure balanced application of nutrients and growth of fertilizer industry.
44

Before NBS

Subsidy per ton= nominated delivered cost - MRPs at which they are required to be sold to the farmers. The normated delivery cost is finalized by Department of Fertilizers based on pricing parameters approved under the New Pricing Scheme (NPS) for indigenous Urea and under the Concession scheme for Phosphatic and Potassic (P&K) fertilizers. At present, Urea, DAP, MAP, TSP, MOP, AS, SSP and 12 grades of Complex Fertilizers are covered under the fertilizer subsidy regime. Excess demand over indigenous production is bridged through import of Urea, DAP, MAP, TSP & MOP. The import of fertilizers is permitted under OGL except for urea, import of which is canalized. However, imported SSP and AS is not covered under concession scheme.

45

Table 14: Per kg NBS for nutrient 'N' 'P' 'K' and 'S' for 2010-2011 w.e.f. 1st April 2010.

Nutrients NBS (Rs./Kg)

N P

23.227 26.276
24.487 1.784
46

K S

Table 15: Per MT NBS for different P&K fertilizers for 2010-2011
Fertilizers DAP NBS per MT 16268

MAP
TSP MOP AS

16219
12087 14692 5195

16:20:0:13
20:20:0: 13 23:23:0:0 10:26:26:0

9203
10133 11386 15521

12:32:16:0
14:28:14:0 14:35:14:0 15:15:15:0

15114
14037 15877 11099
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Recommendations

The first phase of the proposed NBS Policy can be implemented with effect from 1st April 2010. The DOF and DAC should discuss with the Industry and take the written assurance on maintaining the price line around the current level for at least one year. The NBS should be released through the industry during the first phase The MRP of Urea should be increased by 10% w.e.f. 1st April, 2010.
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Proposals

The NBS to N, P, K and S - based on the targeted farm gate prices, total allocation of subsidy requirements as assessed by DAC and the expected international price of major fertilizers. Inclusion of new fertilizers is based on application by manufacturers /importers and need appraisal by lCAR. Distribution and movement of Fertilizers and inputs will continue to be monitored through the on-line web based Fertilizer Monitoring System. (FMS) Freight subsidy only on rail freight. The road freight assumed to be part of fixed subsidy.

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Printing MRP along with subsidy quantum must. Sale above RP punishable under the EC Act. No separate subsidy on fertilizers using already subsidzed fertilizers as inputs. Additional subsidy (decided by DOF) will be provided to indigenous Naptha based, complex fertilizers manufacturers only for 2 years. The NBS would be released through the industry during the first phase. To provide a per ton additional subsidy on subsidized fertilizers with other secondary or micro nutrients. Second phase to move towards release of NBS through retail points. Urea - proposed to be decontrolled. after establishment of the ICT linkage of retail chain with the respective fertilizer company and banks, the competent authority will decide.
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Table 16: Responsiveness of major N P & K fertilizer consumption

AS Urea CAN DAP

Coeff
Intercept Short-term credit Area under fertilizer intensive crops Prices R Square -15.91 0.19 2.26 -0.14

P-value
0.00 0.00 0.00 0.11

Coeff
-13.20 0.23 2.40 -0.44

P-value
0.00 0.00 0.00 0.01

Coeff
-16.51 0.21 2.32 -0.16

P-value
0.00 0.00 0.00 0.04

Coeff
-18.30 0.14 2.43 -0.09

P-value
0.00 0.00 0.00 0.36

0.96

0.96

0.96

0.96

Phosphorus
DAP Coeff Intercept Short-term credit Area under fertilizer intensive crops Prices R Square -21.61 0.28 3.10 -0.48 0.93 P-value 0.00 0.00 0.00 0.00 Super Phosphate Coeff -20.71 0.30 2.91 -0.42 0.92 P-value 0.00 0.00 0.00 0.00 Coeff

Potash
MOP P-value 0.01 0.00 0.00 0.00 0.95
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-12.38 0.37 2.08 -0.49

Table 19: Change in consumption of fertilizer due to price change through NBS
Percent increas e in price levels (2) 11.51 80.00 32.93 -20.00 7.71 14.39 Estimate d Price Elasti cities (3) -0.44 -0.16 -0.14 -0.42 -0.48 -0.49 % increase in price * Price Elasticity (4)=(2)*(3) -5.07 -12.80 -4.61 8.40 -3.70 -7.05 Actual Consumptio n (2008-09) [000 tons] (5) 26649.21 124.00 384.78 2616.61 9231.21 4077.33 Estimated change in Consumptio n over previous year (6)=(4)*(5) -1349.86 -15.87 -17.74 219.80 -341.51 -287.54 Consumptio n estimated for coming year [000 tons] (7)=(5)+(6) 25299.35 108.13 367.04 2836.41 8889.70 3789.79
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Product (1)

Urea CAN AS SP DAP MOP

Table 20: NPK consumption ratio before and after the NBS policy
Product Nutrient percent Product Consumption Nutrient Consumption by product 12258.637 Total Nutrient Consumption NPK Ratio 2008-09 (Actual) Urea N-46% 26649.21

CAN
AS DAP SP MOP Urea CAN AS DAP SP MOP

N-25%
N-20.6% N-18% P-46% P-16% K-60% N-46% N-25% N-20.6% N-18% P-46% P-16% K-60%

124.00
384.78 9231.21 2616.61 4077.33 25299 108 367 8890 2836 3790

31
79.26468 1661.6178 4246.3566 418.6576 2446.398 11637.70 27.03 75.61 1600.15 4089.26 453.82 2273.87

14030.52

5.7

P K

4665.01 2446.40

1.9 1.0

Projected for 2010-11

13340.49

5.9

P K

4543.09 2273.87

2
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Conclusions and Policy Implications

World Fertilizer production, consumption and trade is concentrated in few countries and hence the market is not perfect. Indian fertilizer consumption is growing faster than its capacity to produce and hence imports. The inputs are also imported, and hence the volatility observed as a result of impact of world market. This volatility is leading to higher fluctuations in fertilizer prices resulting in heavy burden on state exchequer in the form of fertilizer bill. The blame that the fertilizer industrys inefficiency is being subsidized, is not wholly correct. In fact, in certain years, it has been implicitly taxed.
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Among farmers, the fertilizer subsidy beneficiaries are, the small and marginal farmers. The trend seems to be similar in all states, except Punjab, where, the consumption is increasing with the increase in land holding size. The fertilizer subsidy is cornered by a few states, namely, UP, AP, MH, MP, and Punjab, but the disparity has come down over years. Rice, wheat, sugarcane and cotton account for about two-thirds of the total fertilizer subsidy, which may have adverse impact on land and environment. The benefits of fertilizer subsidy have spread to unirrigated areas, as the share of area treated with fertilizers has increased, a sign of development towards equity.

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Under the NBS regime, the subsidy per unit of subsidized fertilizers will remain fixed, while their retail prices at the farm-gate level will be decided by market forces. Government has taken steps not to allow the prices immediately, is a welcome step. The new policy may lead to increased imbalanced consumption of NPK, in response to price change. International prices of P and K fertilizers and feedstock/raw materials are highly volatile which might lead to more volatility and perhaps to an increase in farm-gate prices of these fertilizers. If the price hikes happen, it further leads to increased imbalance in fertilizer (N:P:K) use. But the policy may be effective in improving the use of secondary and micro nutrients. Will invoke innovativeness among the fertilizer companies, by additional subsidy sops and profits.

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Thank you.

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