Prime Minister Dr Manmohan Singh has been projected by the media as guru of economic reforms ever since he unleashed radical initiatives after taking charge of finance portfolio in mid 1991.
One of these initiatives was removal of statutory controls over pricing and marketing of all phosphatic and potassic fertilizers. This decision was taken to reduce fertilizer subsidy bill. The Government had, however, retained statutory controls over most popular nitrogenous fertilizer urea and had hinted that subsidy cover on urea too would be phased out in three or four years.
Barring ammonium chloride, ammonium sulphate and calcium ammonium nitrate, the Government never actually stopped subsidising other decontrolled products. Instead of covering them under statutory price and subsidy regime that is applicable to urea only, the decontrolled products are covered by ad hoc subsidies.
The ad hoc subsidies, which are officially known as price concessions, have been subjected to too many pulls and pressures from import and indigenous lobbies as well as by different state governments.
The fertilizer reforms have thus blossomed into a classical example of Manmohanomics gone horribly wrong, forcing the Government to belatedly take remedial measures such as ending discrimination against single super phosphate (SSP) manufacturers.
The incalculable harm that goofed-up reforms have done to poor farmers, inflation-raved Aam Adami, fertilizer self-sufficiency and national food security and, of course, fiscal discipline.
The subsidy bill is set to shoot up by 1451.72 per cent from Rs 5800 crore in 1992-93 (at the start of reforms) to an estimated Rs 90,000 crore in current financial year ending March 31, 2009.
Yes, Rs 90,000 crore is what the Minister for Fertilizer and Chemicals Ramvilas Paswan has demanded in his missive to Prime Minister to ensure that there is no fertilizer shortage and farmers are encouraged to make optimum and balanced use of crop nutrients.
The Finance Ministry has, as usual, provided for an under-estimated allocation of Rs 30,896 crore in 2008-09 budget. A leading fertilizer company had estimated subsidy at Rs 70,000 crore in December 2007 assuming no remedial measures.
Sky-rocketing subsidy especially on imported fertilizers under the garb of phased decontrol does not capture the rot that has set in. It merely shows that the basic objective of phasing out subsidy and its impact on fiscal deficit have misfired completely.
Irrational and ad hoc pricing and subsidy of so-called decontrolled fertilizers forced farmers to use products (especially urea) in larger quantities that carried more subsidy and minimise usage of those that were not subsised or were subsidised miserly. The tinkering with marketing and freight component of subsidy also led to fertilizer shortages in several states as is borne by repeated complaints of the states to the Centre over the years.
The imbalanced use of fertilizers resulted in either stagnation or drop in crop yields, short-circuiting self-sufficiency in food production. The surge in import of wheat, pulses, maize, edible oils, etc. and ban on rice exports is only a reflection of fertilizers goof-up.
The country has lived with adverse ratio in the usage of three primary crop nutrients which is expressed as NPK ratio (nitrogen, phosphate and potash). This indicator does not capture the impact of growing deficiency of secondary nutrients such as sulphur and zinc and micro nutrients such as boron.
The so-called reforms have shifted the reins of fertilizer and food security to the hands of a bunch of global market speculators that are in constant touch with Government-nominated import agencies.
Though, on paper, manufacture of all fertilizers requires no industrial licence, in practice, all urea manufacturers require government approval to even undertake subsidy-saving expansion, leave aside setting up of new plants. Thus, Krishak Bharati Cooperative (Kribhco) and Rashtriya Chemicals and Fertilisers (RCF) have been waiting for final government approval to expand their respective Hazira and Thal production complex for the last 10 years!
Forget expansions. The government subjected urea manufacturers to production controls through manipulation of statutory market controls. It is small wonder then that India started urea imports in 2001-02 after a gap of 22 months. The imports have been on the rise year after year and the subsidy bill on this count has also flared in tandem with rise in their prices in global market.
The government has, however, no qualms in paying higher subsidy on imported urea but drags its feet when it comes to permitting domestic manufacturers to increase production that would require lesser or no increase in urea subsidy.
The bias towards imported diammonium phosphate (DAP) also led the domestic manufacturers to put on back-burner their plans to expand or set up greenfield projects. And the blatant discrimination against producers of DAP substitute, SSP, forced many companies to either close plants or curtail production.
Fertiliser Association of India (FAI) expects the annual shortfall between domestic demand and production to increase to 16 million tonnes of fertilizers by end of financial year 2011-12 from the present 10 million tonnes due to virtual stagnation in domestic capacity addition.
The last major urea plant expansion took place in October 1999. Similarly, the last major DAP expansion happened in October 2002, it says.
?The country is thus heading for acute shortage of fertilizers as was the position during the seventies and eighties unless additional capacities are set up immediately in the country immediately,? FAI adds.
The government woke up to this nightmare only recently when it found that there was global shortage of DAP as well as its raw materials phosphoric acid, rock phosphate and sulphur their prices have reached all-time high.
Thus, Cabinet Committee on Economic Affairs (CCEA) approved new subsidy package to trigger big jump in domestic production of SSP, which, in turn, would reduce reliance on DAP.
The government says that increased production of SSP and resulting easing of the pressure on costlier DAP would help it save subsidy of Rs 2500 crore on DAP. Prices of DAP as well as its intermediates have been rising in global markets over last several months.
The advantage of SSP lies in the fact that 65 per cent of it is produced from low-grade rock phosphate that was mined locally. DAP, on the other hand, is either imported and produced locally from imported phosphoric acid and/or imported rock phosphate and sulphur.
SSP has 16 per cent water-soluble phosphate as compared to 46 per cent in DAP. Taking phosphate content alone, three tonnes of SSP can replace one tonne of DAP.
SSP contains 11 per cent sulphur and 16 per cent calcium and is beneficial to soils that are deficient in these two nutrients. CCEA has approved fixation of uniform all-India maximum retail price of Rs. 3400 tonne for powdered SSP. At present, state governments fix separate SSP prices, though Central Government pays fixed subsidy of Rs 1125 tonne to manufacturers.
The current cost of production of SSP from imported rock phosphate is Rs 9030 tonne and Rs 7058 tonne in case of domestic rock phosphate.
The BJP-led governments in Rajasthan and Madhya Pradesh have lately, on their own, encouraged their respective public undertakings to embark on projects to either expand or open new rock phosphate mines, thereby laying the base for revival of SSP industry, according official documents.
The Centre is, however, still dragging its feet on announcing an investment policy for domestic urea industry and another policy for overseas joint ventures in countries that have abundant availability of inputs at cheap prices.
Department of Fertilizers itself reckoned Swadeshi factor in November 2007. An official note contended: ?At the same level of gas prices, the country will save approximately $60 tonne of urea by producing within the country as compared to imports from Middle-East countries on price equivalent to cost of production. The savings will be on account of lower capital cost ($20 tonne), shipping freight ($20 tonne) and port handling charges ($20 tonne). In addition, there will be savings on account of internal transportation of urea depending upon the location of the plant.?
FAI reckoned in December 2007 that the average farmgate price of imported urea was Rs 17,000 tonne, compared to Rs 12,000 tonne for domestic product. The average farmgate cost of domestic urea produced by gas-based plants was much lower at Rs. 8,000 tonne.
Similarly, the farmgate price of domestic DAP was only Rs 19,000 tonne, as against Rs 27,000 tonne for imported product.
Industry sources suggest that the government should no longer delay unveiling of investment policy for entire fertilizer sector. Simultaneously, it should implement its proposal to give subsidy on crop nutrient and not on fertilizer as a product. This would wipe out the existing bias for certain fertilizers, enabling farmers to make rational choice of fertilizer by taking into account subsidies on nutrients.
The self-sufficiency in fertilizer manufacture would thus help reduce fertilizer subsidy, which can be slashed further by reducing the price of natural gas and naphtha or by subsidising their availability to fertilizer industry.
Common sense suggest that it is cheaper to subsidise small quantity of input at the start of agricultural value chain instead of subsidising larger volume of products midway (fertilizer) or much larger quantity of final product (foodgrain) at the end of the chain.
Industry sources suggest the government should also allow encourage manufacturers to formulate multi-nutrient blended fertilizers tailored to meet the requirements of specific soils and crops. This would constitute a major step in re-achieving food self-sufficiency.
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