People's Democracy

  Stop Govt From Pursuing Disastrous Policies

S Ramachandran Pillai

THE meeting on May 25, called by the finance ministry to discuss the fertiliser subsidy was attended by representatives of All India Kisan Sabha, Bharatiya Kisan Union, Rajya Rytu Sangha of Karnataka, Fertiliser Producers Association, fertiliser public sector undertakings and government officials and economists. I attended the meeting as a representative of the All India Kisan Sabha. The fertiliser subsidy played an important role in achieving substantial growth in agricultural production, particularly in foodgrains production. In the name of targeting to poor and needy, the government is moving to give up subsidies on fertilisers.

Government promoted the use of modern inputs and technology to achieve primarily self-sufficiency in foodgrain production and growth in agricultural production. As a part of that process, government tried to achieve maximum possible degree of self-sufficiency in the production of nitrogenous fertiliser. Naptha, fuel oil and low sulphur heavy stock and liquefied natural gas are used as feedstock to produce nitrogenous fertiliser. Out of the total production, 30 per cent is produced using Naptha, 10 per cent produced using fuel oil and low sulphur heavy stock and 60 per cent is produced using gas. Even though 60 per cent of the units are liquefied natural gas based, due to the non-availability of natural gas, even these units are also using Naptha as feedstock. The use of Naptha and fuel oil is increasing the cost of domestic production and fertiliser subsidy.

India is self-sufficient to the extent of 90 per cent in the case of nitrogenous fertilisers. The shortage of raw-materials is a serious restraint in achieving self-sufficiency of phosphatic fertilisers. Therefore, a mixed strategy was adopted by going for a combination of domestic production based on indigenous and imported raw-phosphate and imported sulphur, domestic production based on imported ammonia and phosphatic acid, and import of finished products such as DAP. Seventy per cent of the requirement is met through the first two means. In the case of potash, the entire requirement is met through imports.

In pursuance of the policy of providing fertilisers to peasants at affordable price and for ensuring an adequate return on investment to the entrepreneurs, the Retention Price cum subsidy scheme was introduced by the government in November 1977. The Retention Prices are fixed by the government taking into account the cost of the project, vintage of the plant, feedstock, consumption norms etc. Under the scheme, the difference between statutorily notified sale price of the fertilisers to the consumers and the Retention Price is paid by the government as subsidy to the fertiliser units. The Retention Price Scheme (RPS) introduced in the case of nitrogenous fertilisers in November 1977 was extended to complex fertilisers in February 1979. In August 1992, potasic and phosphatic fertilisers were decontrolled and the RPS thus got confined only to urea. Subsequently, the prices of the phosphatic and potasic fertilisers increased sharply leading to fall in consumption. In order to reduce the impact of increase in prices of these fertilisers and to arrest the decline in their consumption, the government introduced a concession scheme from 1992-93 at the rate of Rs 1000 per metric tonne. The scope and coverage of concession scheme has been subsequently enhanced.

The background note circulated by the finance ministry states that the fertiliser subsidy is increasing and the system suffers from:

1. Ecological damage on account of distorting the NPK balance,

2. Moral hazard problem for not rewarding efficient units and fully compensating inefficient units, and

3. Being not targeted to farmers particularly in the sense of progressiveness in benefits to small and marginal farmers.

It is a fact that due to the policies pursued in the past, a portion of the subsidies is appropriated by the fertiliser units. According to a report placed by the government in Parliament in December 2004, the average share of the farmers in the fertiliser subsidy for the entire period of 1981-82 to 2002-03 was 62 per cent and the residual 38 per cent goes to industry. Hence, it is suggested that the fertiliser subsidy system should be redesigned by targeting fertiliser subsidies to the poor and truly needy peasants.

The other policy options on restructuring fertiliser subsidy, including urea imports, is that the subsidy system should be redesigned and a flat rate subsidy may be introduced with two different rates of subsidy for domestic producers and importers in the short run and a single rate in the medium term. The other suggestions are:

1. Periodical increase in farm gate price of urea.

2. To protect the poor and marginal farmers, tradable coupons could be distributed.

3. In terms of growth, public investment in irrigation may prove more effective than the instruments of price policy.

The Expenditure Reforms Commission estimated that phasing out of fertiliser subsidy on foodgrains production, if other things remaining unchanged, would lead to the fall in foodgrain production of about 13.5 million tonnes. According to them, the decline in production can be arrested by taking steps like improvement for irrigation facilities and availability of credit through higher public investment. Even otherwise, there is need for more public investment in expanding irrigation facilities, power facilities, science and technology, infrastructure facilities etc. It is also necessary to increase the institutional credit facilities. Now, the tall talk that the government will make more public investments in these areas is only a ruse to hoodwink the peasantry to accept reduction in fertiliser subsidies.

The agrarian sector is facing a large-scale crisis and the rate of foodgrain production and agricultural production is declining. Any reduction in fertiliser subsidy will have serious adverse effects in foodgrain production and agricultural production. In the present situation, peasants are facing serious difficulties due to the increase in input costs and fall in prices of agricultural commodities. The fertiliser price increase will have the twin effect of fall in production and increase in the input costs.

The subsidies given to the agriculture sector in India is less than the allowable subsidies fixed by the WTO. As a proportion of GDP, fertiliser subsidy, after expanding from 0.23 per cent in the early 1980s to a peak of 0.93 per cent in 1989-90, started to decline and was estimated at 0.43 per cent in 2003-04. Compared with many other countries (United States – 103 kg per hector, China – 254 kg per hector), India’s consumption of fertiliser remains low – 98 kg per hector.

Subsidy should be continued for all types of fertilisers. The present retail price of fertilisers should not be increased.

Targeting of fertiliser subsidy to the poor and needy is an impossible proposition. Any targeted scheme will immediately raise the fertiliser price and will hit all peasants, including the poor peasants most. The big variation in farm size and variation in dry/irrigated status of farms will create imponderable practical problems in identifying poor and needy. A 15 hector dry farm in Rajasthan can be actually poor, while a 2 hector irrigated farm in Punjab, Andhra Pradesh or western Uttar Pradesh is well to do. So, any attempt to target will leave out millions of poor peasants. In addition to these practical problems, in many parts of the country, land records are not available. The suggestion to provide tradable coupons to protect the poor and marginal farmers is another impractical suggestion. If the fertiliser prices are not controlled, the tradable coupons cannot provide any relief. This issue has been already dealt in the article on food subsidy. If the government is really sincere to help the poor and needy, it should, while continuing the present subsidies, find a mechanism to provide additional subsidies to the poorer sections among the peasants who produce mainly for their consumption and are not getting the benefits of minimum support price mechanism as they have no surplus to sell.

The RPS has certain deficiencies. This has to be tackled without closing down fertiliser units particularly public sector units. Now many fertiliser units are closed down in many parts, particularly in eastern zone. Due to this, there is great unevenness in the availability of chemical fertilisers in different parts of the country. Any change in the RPS should not ignore the present realities and the need to maintain availability of fertilisers to peasants. As explained, India has to increase fertiliser consumption to increase foodgrain production and agricultural production..

India is a large country and if enough attention is not given to produce fertiliser to meet domestic requirements, country will be facing serious difficulties. At present, in the case of certain fertilisers, import may have some temporary advantage. But if a vast country like India goes to the international market permanently for country’s requirement of fertilisers, the prices will shoot up and India will be at the mercy of multinational companies. India should not give up priority on indigenous manufacturing.

The proposal to hike urea prices in order to restore NPK balance is irrational. Instead of hiking urea price, more subsidy should be given for phosphatic and potasic fertilisers in order to restore NPK balance. As a part of the new economic policies, the government has dismantled the extension system. Lack of extension work among the peasantry on scientific farming and non-availability of different types of fertilisers are other reasons for imbalance in the use of NPK. When we talk about NPK balance, the nature of the soil, the needs of the different crops also should be considered.

The present move of the government is based on the dictates of World Bank. In a recent report on India, the World Bank had given the following advice to the Indian policy makers: "Bold action from policy makers will be required to move away from the existing subsidy based regime and instead invest in building a solid foundation for a highly productive, internationally competitive, diversified agriculture sector".

The government may move ahead with their plan to reduce fertiliser subsidies. Strong public opinion and popular intervention can restrain the government. Peasants, agricultural workers, workers and all other sections of the common people should rally together to stop the government from implementing the disastrous policies.