Fetiliser Prices & Subsidies

Prices

In India, fertilisers are manufactured by various units, which use a variety of basic feedstocks and technologies. The feedstocks are fuel oil, naphtha, coal and gas. It is, therefore, natural that cost of production per unit of fertiliser varies from plant to plant. This apart, the economic cost of imported fertiliser is different than the domestically produced fertiliser. One of the elements of fertiliser pricing policy followed in the country till 1991 was to have a single price for a specific grade of fertiliser throughout the country irrespective of the plant in which they are produced. Therefore, the selling prices of different grades of fertilisers were statutorily fixed by the Government of India. The margins retained by various agencies engaged in the sale of fertilisers are also statutorily fixed by the government.

In order to reconcile the uniform sale price and varying cost of production across manufacturing plants, a Retention Price Scheme (RPS) was introduced in late seventies in the country. Under this scheme, if a manufacturer’s net realization from the sale of fertilisers at the government controlled rate ( the same farm gate price throughout the country) falls short of the retention price, the government pays the difference as subsidy to the fertiliser manufacturers. The retention price is fixed for each fertiliser plant by the government. The retention price is fixed after taking into account the type of feedstock or raw material being used, cost of other inputs and maintenance such that under the assumption of 80% capacity utilization, the plant is able to earn 12% post tax return on its net worth. The basic rationale of adopting the RPS was that it reduces uncertainty of returns on investment and encourages the fertiliser plants to increase capacity utilization and that it also attracts investments by both existing plants and new entrepreneurs. One other element of fertiliser price policy adopted in India is that the prices of fertiliser were kept low so that farmers have the incentive to use more fertiliser which has been the very important purchased input for increasing the productivity of crops. In an endeavor to keep fertiliser prices at the levels lower than the economic cost of domestic production or of imports, the gap between the two widened. This gap is what is usually termed as fertiliser subsidy.

Since July 1991 (the period when a programme of economic reforms was launched in the country), there have been considerable changes in the fertiliser pricing policy. The low analysis nitrogenous fertiliser (like Ammonium Sulphate and Calcium Ammonium Nitrate) were decontrolled with effect from July 25, 1991. These were again brought under price control with effect from August 25, 1992 but were finally decontrolled with effect from June 10,1994. Phosphatic, Potassic, NP and NPK fertilisers were decontrolled with effect from August 25, 1992. Thus beginning from June 10,1994, all fertilisers, except urea, have been decontrolled. Though the objective of decontrol was to reduce the burden of subsidies on the government exchequer, the actual out go on this account has not decreased. Owing to the decontrol of phosphatic and potassic fertilisers, their prices shot up and the government had to announce adhoc subsidy to reduce the burden on the farmers.

Fertiliser subsidy

The subsidy on fertilisers as defined in India is the difference between net realization by the domestic fertiliser manufacturers (farmer’s price minus distribution margins) and the ex-factory retention price (inclusive of equated freight) fixed by the government. In the case of imported fertilisers, the subsidy is the difference between the C.I.F. (cost, insurance and freight) price of imported fertiliser plus the pool handling charges and the farmer’s price (excluding dealer’s margins and sales tax).

Although it is a fact that fertiliser subsidy exits because fertiliser is sold to the farmers at a price lower than its economic cost but it is not true that the benefits of this subsidy accumulate only to the farmers who use this fertiliser. In this connection, it is important to recognize that the fertiliser subsidy although induces farmers to use more fertiliser which increases the production of agricultural commodities but if as a part of the overall price policy, the prices of farm products are also kept low, the benefits of fertiliser subsidy also accrue to the consumers of farm products. The consumers are able to get food products at affordable prices and the industries, which use raw material from the agricultural sector, are able to keep the cost of production of such manufactured goods low.

In this context, it is relevant to look at the prices of fertilisers in relation to the prices of farm products. In 1980, an Indian farmer had to forgo 4.58 kg of paddy to buy one kg of N and 5.55 kg of paddy to buy one kg of P₂O₅. During the same period, a farmer in Japan had to sell only 0.68 kg and 0.55 kg of paddy to buy one kg of N and P₂O₅ respectively. In 1988, while an Indian farmer had to sell 3.19 kg of paddy to buy a kg of N, the Japanese farmer had to sell only, 0.34 kg of paddy to buy a kg of N. in 1988, for buying 1 kg of N, the quantity of paddy to be sold was 0.66 kg in Korea, 2.16 kg in Pakistan and 3.08 kg in U.S.A.

In 1993, to buy a kg of N, a farmer in India had to sell 1.94 kg of paddy, whereas the quantity of paddy required to be sold by the farmer was 1.87 kg in Bangladesh, 1.79 kg in China, 0.32 kg in Japan and 0.40 kg in Korea. For buying a kg of P, the quantity of paddy require was 4.60 kg in India as against 3.24 kg in Pakistan, 2.26 kg in China and 0.72 kg in Japan. In fact, except Bangladesh, the P to paddy price ratio was the highest in India.

Over the years, although the cost of domestic and of imported fertilisers has increased but the sale prices of fertilisers were not raised commensurate with the increase in the cost. This apart, the consumption of fertiliser has expanded rapidly. Therefore, subsidy bill has continuously increased over the years. The amount of subsidy outgo on indigenous imported fertilisers in India during the last 25 years.

There was no subsidy on indigenous fertilisers up to 1975-76. It was only the imported fertiliser that was subsidised. Following the introduction of fertiliser retention price and subsidy scheme with effect from November 1977 and due to the increasing trend in production/consumption, subsidy on fertiliser increased from 604 crores in 1979-80 to as much as Rs. 6235 crores in 1995-96.

Between 1980-81 and 1990-91, there has been no increase in the fertiliser prices. In 1991-92, the government raised the prices of fertilisers by 30% to minimise the drain on budgetary resources. However, the small and marginal farmers were exempted from this fertiliser price increase. This policy amounted to a dual price framework in which the small and marginal farmers were to be given fertiliser at low prices while other farmer shad to pay a higher price. As it was not easy to implement a dual price policy for such a farm input, it was given up later.

Subsidy on fertilisers is common in most of the developing countries, though the rate of subsidy varies across countries and types of fertilisers. Though the direct effect of fertiliser subsidy is to provide fertiliser to the farmers at a price lower than its economic price, the ultimate benefits of the subsidy accrue either to the farmers or to the consumers or both depending on the package of other policies including product price policies. Differential rate of subsidy on nitrogenous, phosphatic and potassic fertiliser was used to correct the imbalance fertilisers, their prices rose sharply leading to the distortion in the use ratio of N, P and K.

During the Ninth Five year Plan, it is proposed to decontrol all the fertilisers including urea. The option of providing a flat subsidy on each of the fertiliser including Urea, DAP, MOP, SSP and other low analysis nitrogenous fertilisers in place of retention price-cum-subsidy (RPS) scheme for urea and adhoc concessions on decontrolled fertilisers is being examined by the government.