Key Facts About Fertilizer Subsidy Policy in India

Fertilizer subsidy is the difference between the retention price of fertilizers and the price at which fertilizers are made available to consumers. The difference is paid to industry as subsidy. Fertilisers, after oil and food, account for the third-biggest share of India’s total subsidy bill, which is estimated at Rs 2.46 crore for 2014-15. The total fertiliser subsidy in 2014-15 has been pegged at Rs. 67,970 crore. Out of this, subsidy for imported urea is pegged at Rs 12,300 crore, domestic urea is Rs 31,000 crore and sale of de-controlled fertilisers (like phosphatic & potassic fertilisers) is Rs 24,670 crore.

What are the major issues of Fertilizer Subsidies?

Application of fertilisers was popularised in our country during the Green Revolution of the 1960s and the 1970s. Incremental use of fertilizers in synergy with high yield seeds proved to be of tremendous contribution to the success of Green Revolution. However, the prices of fertilizers kept increasing. Since the Government wanted to encourage use of mineral based fertilizers; it started providing reimbursements to companies to compensate for high cost of production for the mineral-based fertilisers and for selling it at low costs to the farmers. This is all what we call fertilizer subsidy.

However, this has been a major contentious issue today. The major problems are as follows:

  • The objective of the government is to support the farmers but the question is exactly how much of that really goes to the pocket of the farmers and how much is siphoned by the companies.
  • It has been debated that the beneficiaries have been the large farmers and not small & marginal farmers.
  • While deciding on the subsidy regime, it has to be kept in mind that Urea accounts for almost 50 per cent of fertiliser application and India is NOT self sufficient in Urea production. At the same time, distorted subsidy regime may deplete the NPK use ratio. The normally accepted ratio is 4:2:1.

Backgrounder on Fertilizer Subsidy Policy

Till 2003, the subsidy to urea was under the provisions of the Retention Price Scheme (RPS). Under RPS, the difference between retention price (cost of production as assessed by the Government plus 12% post tax return on net worth) and the statutorily notified sale price was paid as subsidy to each urea unit. Later the RPS regime was dismantled and a Concession Scheme for urea units based on the prices of feedstock used and the vintage of plants was introduced in 2003. This was called New Pricing Scheme or NPS. It had various phases like NPS-I (2003-2004), NPS-II (2004-2006) and NPS-III (2006 onwards). The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers.

Urea is the only controlled fertilizer, which is sold at statutory notified uniform sale price. The Phosphatic and Potassic fertilizes are under a decontrolled regime and are sold at indicative maximum retail prices (MRPs).

However, the New Pricing Scheme resulted in distortion of the market. The fertilizer companies started bleeding due to fixed Urea prices and rising cost of Inputs such as Natural Gas and Naptha as 80% of the production of urea in India is gas-based.  The government increased the prices of Urea but still the prices have been skewed.

At present, the urea-based fertilizers cost Rs. 5,360 per tonne, while the potash and phosphate fertilizers cost Rs. 24,000 per tonne.

Since, Urea is available at such a cheap price that people not only started unbalanced use of this fertilizer but also misused it by illegally exporting, preparation of adulterated milk etc.

Urea Decontrol

There has been a long pending demand of decontrol of Urea but decontrolling urea is a politically sensitive issue. The Planning Commission’s Soumitra Choudhary panel had recommended that the NBS policy, which is applicable only on P and K fertilisers needs to be extended for urea also. This has become all the more desirable to maintain the ratio between MRP of urea vis-a-vis P and K fertilisers, which is essential for balanced fertilisation.

Nutrient Based Subsidy (NBS) scheme

To foster the balance use of fertilizers; government is implementing Nutrient Based Subsidy (NBS) policy w.e.f. 1st April 2010 for fertilizers other than Urea. The fertilizers included in this scheme include 22 grades of decontrolled fertilizers namely DAP, MAP, TSP, DAP Lite, MOP, SSP, Ammonium Sulphate and 15 grades of complex fertilizers.  These fertilizers are provided to the farmers at the subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers. Additional subsidy is also provided on the fertilizers fortified with secondary and micronutrients as per the Fertilizer Control Order such as Boron and Zinc.

This subsidy given to the companies is fixed annually on the basis of its nutrients content (i.e. Nitrogen, Phosphate, Potash and Sulphur).

Under this scheme, Maximum Retail Price (MRP) of fertilizers has been left open and manufacturers/marketers are allowed to fix the MRP at reasonable level.  However, this scheme failed to produce any result mainly due to huge difference in prices of Urea and other fertilizers.

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