Should Urea Prices Be Increased?

Any move to increase fertiliser prices is always met with strong opposition in the name of poor farmers. But it turns out that Indian farmers pay the lowest prices for urea than their counterparts in similar countries.

A working paper, Rationalising Fertiliser Subsidy in India: Key Issues and Policy Options, authored by Ashok Gulati, Infosys Chair professor of agriculture at the Indian Council for Research on International Economic Relations ICRIER) and co-author Pritha Banerjee, points out that farmers in India pay $86 per metric tonne (MT) for urea (that works out to Rs 5360) against $362 in Pakistan, $207 in Bangladesh, $265 in China, $148 in Indonesia and $462 in the Philippines. International prices are $300.

Is it any surprise, then, that there’s huge diversion of urea to neighbouring countries? Urea is also being diverted to non-agriculture uses and this is something the government has been wrestling with since 2010. Gulati and Banerjee say an estimated 10-20 per cent of urea is diverted. The problem of diversion of urea to industry has been addressed somewhat by making neem coating mandatory; since May it has been made compulsory for all urea, both domestically produced and imported. But this will not check urea being smuggled for agricultural use to neighbouring countries.

Only an increase in prices will make that unviable. Gulati estimates that the extent of increase should be as much as 200 per cent. Not only is this politically unfeasible (even if it is done in a phased manner), says Gulati, but this will lead to an increase in minimum support prices (MSP). China and Pakistan, the paper points out, offset their higher fertiliser costs with higher MSPs. The MSP for wheat in Pakistan is $320 per MT and in China $385 per MT. In India it is $226.

But increasing the fertiliser price to more realistic levels and, following that, the MSP will lead to a huge jump in the government’s food subsidy bill, since the National Food Security Act caps the price at which wheat and rice are sold through the public distribution system at Rs 2 and Rs 3 per kg respectively for three years. Given the NFSA’s provisions, Gulati says, the MSP hike will also distort the cropping patterns in favour of wheat and rice.

But there is no getting away from increasing fertiliser prices and deregulating the sector. Gulati says this has to be well thought out. He prefers starting with decontrolling the phosphatic and potassic fertiliser sectors, which are already deregulated to an extent, and switching to a direct benefit transfer (DBT) of the subsidy to farmers’ bank accounts. After this, he says, the urea sector should be decontrolled gradually.

Gulati doesn’t think fertiliser subsidy was an inherently bad idea; he notes that it has had a positive impact in terms of increased fertiliser consumption which increased crop production and yields. But it also had some negative effects – it could not incentivise an increase in domestic fertiliser production, it increased the import dependence of the sector and encouraged the over-use of urea relative to other fertilisers, leading to soil degradation.

The paper charts out how governments have pussy-footed on the issue of subsidy reform in the case of fertilisers. Indeed, both Manmohan Singh and Yashwant Sinha were forced to rollback even minor increases in fertiliser prices announced in the budget. Gulati and Banerjee point out that the Atal Behari Vajpayaee government started the process of reforming the fertiliser subsidy regime on the lines of the recommendations of the Expenditure Reforms Commission headed by K. P. Geethakrishnan. The first phase of a New Pricing Scheme (NPS) was introduced in 2003. The United Progressive Alliance (UPA) government went ahead with the second and third phases of the NPS. But the fourth phase, which involved increasing the urea prices by 7 per cent each year, followed by total decontrol, was never implemented.

Gulati, however, commends two reform initiatives – the pooling of gas price for urea plants so that they all get gas at the same price (which, he says, is a necessary first step to decontrolling the sector) and the use of neem-coated urea. Neem coating not only checks diversion, more importantly, it retards the release of nitrogen from urea and reduces wastage. Higher nitrogen use efficiency leads to increased crop yields.

But these reforms are not enough, says Gulati and he sets out a reform plan, in addition to phased decontrol. Direct cash transfer of the subsidy to farmers is an essential part of this. Artificially suppressing the price of urea only helps the fertiliser industry, notes Gulati. The subsidy amount should be revised at regular intervals. He suggests that if the government wants to make this progressive, it can give farmers with holdings below 4 hectares a higher rate of subsidy than others. Not only will this stop diversion but will also discourage farmers from using more of urea just because it is cheap.

He, however, wants the DBT to come with a rider – farmers must get their soil tested every two or three years. That means, he says, the government must ramp up infrastructure and facilities for soil testing and issue soil health cards (something this government has done). An essential accompaniment – even a precursor – of DBT in the case of fertilisers, says Gulati, has to be a renewed thrust on digitisation of land records. Without this, he warns, it will be impossible to identify needy farmers and to transfer subsidies to them or even issue soil health cards. But land records is a state subject and is handled by local governments. So getting this done uniformly across the country is going to be a tough call.

A lot of what Gulati has suggested has been said before. Governments have balked at biting the bullet. Will this government have the courage to go ahead?