Ashok Gulati On How Skewed Subsidy Policies Are Killing The Fertiliser Industry

According to Prof Ashok Gulati, the government owes fertiliser industries more than Rs 40,000 crore in subsidy bills. Unpaid fertiliser and food subsidy bills put together now exceed Rs 1,00,000 crore.

Apart from unpaid bills the sector seems to be reeling from a number of structural issues that have been caused mostly due to successive government’s carrying on with a flawed subsidy regime. Prof Gulati lists at-least three things that are wrong:

• The government heavily subsidises urea relative to other equally important fertilisers that enrich soil with nitrogen,potassium and phosphorus. This incentivises farmers to use more urea than necessary thereby affecting soil health and productivity.
• The government’s inordinate delay in processing subsidy bills to fertiliser manufacturers puts the industry into a depression. This affects investments into the sectors which lead to more imports. Imports of nitrogen, for example, has rise from 10% of total consumption to one third today.
• Finally, there is the issue of subsidy leakage. Subsidised urea, for one, is smuggled for commercial/non-agricultural uses.

If the current set of policies were to continue the government would be willy-nilly discouraging new investments into fertiliser sector. Only cronies with the clout to extract payments due from the government will be willing to risk investing in the industry today. Because the government has effectively discouraged new investments in the sector there will be a capacity shortage that will be met by imports and more orders for cronies.

What is the way out?

Here are three main suggestions from Prof Gulati:

• The government must pay off the subsidy bills. The government simply cannot take delivery of goods, or approve subsidies delivered indirectly, and not pay the manufacturers for so long. Rs 40,000 crore is a lot of money – enough to cripple any new investments and discourage new players.
• Move urea to the Nutrient Based Subsidy regime wherein subsidy amount is directly linked to the constituent nutrition contained in the fertiliser. This, according to Prof Gulati, will bring down prices of other fertilisers while increasing the price of urea.
• Finally, move fertiliser subsidies to the Direct Benefits Transfer model. Under the model, farmers will receive the subsidy in proportion to their area of cultivation directly in their bank accounts through electronic cash transfer. This eliminates middlemen and cronies in the industry.

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