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Reforming the fertilizer sector

Context:

Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill, promote the efficient use of fertilizers, achieve balanced use of N, P and K (nitrogen, phosphorus and potassium), and reduce water and air pollution caused by fertilizers like urea. 

Relevance:

GS-III: Agriculture, GS-III: Indian Economy (Growth and Development of Indian Economy, Mobilization of Resources)

Dimensions of the Article:

  1. Background to the Fertilizer sector
  2. More about Agri Input: Fertilizers
  3. Issues related to fertilizers in India
  4. What is a Fertiliser Subsidy?
  5. Government Measures
  6. About Nutrient-Based Subsidy Regime
  7. Issues Related to NBS
  8. Challenges in Fertilizer Subsidy
  9. Way forward

 

Background to the Fertilizer sector

  • Since 1991, when economic reforms began in India, several attempts have been made to reform the fertilizer sector to keep a check on the rising fertilizer subsidy bill.
  • The Government of India established the “Central Fertilizer Pool” in 1944 to ensure equitable distribution of all fertilizers at fair prices all over the country.
  • For 2021-22, the Union Budget has estimated fertilizer subsidy to reach a much higher level due to the recent upsurge in the prices of energy, the international prices of urea and other fertilizers, and India’s dependence on imports.

More about Agri Input: Fertilizers

Fertilizer use has seen rapid expansion and intensification in India and in other parts of the world with the spread of the Green Revolution technology. With the scope for raising production through the expansion of cultivable land exhausted, fertilizer will continue to play a key role in meeting the future requirement of food, feed and fibre. Therefor it is important that fertiliser is used judiciously and optimally.

  • Fertilizers supply three critical macro elements: nitrogen (N), phosphorous (P) and potash (K). A common belief is that the ideal balance among N, P and K in India is 4: 2: 1. But these proportions represent average across different soil types, crop and water availability.
  • Moreover, independently of the proportions, the optimal level of fertilizer use also varies according to soil type, level of yield, crop and water availability.
  • Soil type matters because the naturally available content of the nutrients varies across soil types. Similarly, there being complementarity between water and nutrient absorption capacity, optimal levels of fertilizer use are higher in irrigated than rain-fed regions.
  • Finally, cereals such as rice, wheat, maize and jowar, cotton and sugarcane require larger doses of nitrogen per ton of output than pulses and fruits and vegetables.

Issues related to fertilizers in India

  • Beginning with the launch of the Green Revolution, fertilizer use in India has steadily grown but it has been disproportionately tilted in favour of urea, the source of nitrogen.
  • Already in the early 1970s, the average proportions across N, P and K were 6:1.9:1, they shifted in favour of nitrogen over time reaching 10:2.9:1 in 1996.
  • The average consumption of fertilizers in India rose from 105.5 kg per ha in 2005-06 to 128.34 kg per ha in 2012-13. But the level remains well below what is observed in the neighbouring Pakistan (205 kg per ha) and China (396 kg per ha).
  • National Institute of Agricultural Economics and Policy (NIAP) study reports that one third of the major states apply excess N and two thirds apply it at below optimum level.
  • Due to low use of organic fertilisers and increase in productivity and crop intensity micro nutrient deficiency in the soils is on increase. Thus, beside N, P and K use of micro nutrients also needs to be increased.
  • Finally, a major problem with the current regime arises from canalization of urea imports. Because imports are seen as the source of filling the gap between demand and domestic supply, often there are bureaucratic delays in the issuance of licenses and imports being reaching farmers resulting in shortages some time.

What is a Fertiliser Subsidy?

  • Farmers purchase fertilisers at MRPs (maximum retail prices) that are lower than their regular supply-and-demand market rates or the cost of production/importation.
  • Non-urea fertiliser MRPs are deregulated or set by the firms.
  • The Centre, on the other hand, pays a fixed per-tonne subsidy to guarantee that these nutrients are priced at “reasonable levels.”

Government Measures

  • Nutrient Based Subsidy (NBS): The government introduced the Nutrient Based Subsidy (NBS) in 2010. It aims to address the growing imbalance in fertilizer use in many States, which is skewed towards urea (N). The Centre announces Nutrient Based Subsidy (NBS) rates for P&K (Phosphatic & Potassic) fertilisers every year.
  • Di-Ammonium Phosphate (DAP) Subsidy: Recently, the government had increased subsidies by 140% on DAP because of the surge in global prices.
  • Urea Subsidy: In the case of urea, the government has fixed the maximum retail prices (MRP) of urea. The difference between the MRP and the cost of production is reimbursed to manufacturers in the form of a subsidy.

About Nutrient-Based Subsidy Regime

  • Under the Nutrient-based subsidy (NBS) regime – fertilizers are provided to the farmers at the subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
  • Also, the fertilizers which are fortified with secondary and micronutrients such as molybdenum (Mo) and zinc are given additional subsidy.
  • Under the Nutrient-based subsidy (NBS) regime, the subsidy on Phosphatic and Potassic (P&K) fertilizers is announced by the Government on an annual basis for each nutrient on a per kg basis – which are determined taking into account the international and domestic prices of P&K fertilizers, exchange rate, inventory level in the country etc.
  • NBS policy intends to increase the consumption of P&K fertilizers so that optimum balance (N:P:K= 4:2:1 ) of NPK fertilization is achieved.
  • This would improve soil health and as a result the yield from the crops would increase resulting in enhanced income to the farmers.
  • Also, as the government expects rational use of fertilizers, this would also ease off the burden of fertilizer subsidy.
  • It is being implemented from April 2010 by the Department of Fertilizers, Ministry of Chemicals & Fertilizers.

Issues Related to NBS

  • Urea is left-out in the scheme and hence it remains under price control as NBS has been implemented only in other fertilizers.
  • There is an imbalance as the price of fertilizers (other than urea) — which were decontrolled have gone up from 2.5 to four times during the 2010-2020 decade. However, since 2010, the price of urea has increased only by 11%. This has led to farmers using more urea than before, which has further worsened fertilizer imbalance.
  • Considering that fertilizer subsidy is the second-biggest subsidy after food subsidy, the NBS policy is not only damaging the fiscal health of the economy but also proving detrimental to the soil health of the country.
  • Subsidised urea is getting diverted to bulk buyers/traders or even non-agricultural users such as plywood and animal feed makers. It is being smuggled to neighbouring countries like Bangladesh and Nepal.

Challenges in Fertilizer Subsidy

  • Policy Change: Farmers tended to move towards balanced use, but policy and price changes reversed the favourable trend a couple of times in the last three decades.
  • Improper Use: The almost freezing of the MRP of urea in different time periods and its rising sale led to an increase in an indiscriminate and imbalanced use of fertilizers.
  • Environment Impact: Concerned with the adverse environmental impact of certain chemical fertilizers, some sections of society suggest the use of organic fertilizers and biofertilizers instead.
  • Inter-State Disparities: There are also implications of inter-State disparities in fertilizer subsidy due to high variations in subsidy content, which is highly biased towards urea and thus nitrogen. As a result, the magnitude of fertilizer subsidy among the major States ranges in the ratio of 8:1.
  • International Prices: The international prices of fertilizers are volatile and almost directly proportional to energy prices. These extraordinary price rises are on account of a sharp upsurge in international energy prices and supply constraints in major producing countries due to robust domestic demand, production cuts and export restrictions.
  • Fiscal Concerns: In order to minimise the impact of the rise in prices on farmers, the bulk of the price rise is absorbed by the government through enhanced fertilizer subsidy. This is likely to create serious fiscal challenges.

Way forward

In order to address the multiple goals of fertilizer policy, we need to simultaneously work on four key policy areas.

  • Self-Reliance: We need to be self-reliant and not depend on the import of fertilizers. In this way, we can escape the vagaries of high volatility in international prices.
  • Expanding Nutrient Based Subsidy (NBS) Programme: The present system of keeping the price of urea fixed and absorbing all the price increases in subsidy needs to be replaced by the distribution of price change. We need to extend the Nutrient Based Subsidy (NBS) model to urea and allow for price rationalisation of urea compared to non-nitrogenous fertilizers and prices of crops.
  • Alternative sources of nutrition: There is a strong desire to shift towards the use of non-chemical fertilizers as well as a demand for bringing parity in prices and subsidies given to chemical fertilizers with organic and biofertilizers. This also provides the scope to use a large biomass of crop that goes waste and enhance the value of livestock by-products. We need to scale up and improve innovations to develop alternative fertilizers.
  • Improving fertilizer efficiency: India should pay attention to improving fertilizer efficiency through need-based use rather than scattering fertilizer in the field.

-Source: The Hindu

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October 2022
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