Fertilizer Subsidies and Consequences

The utilization of fertilizer in India has witnessed a significant surge since the inception of the Green Revolution in the mid-1960s.
In order to incentivize and streamline the adoption of fertilizers, the government has implemented subsidies for farmers.
This initiative has transformed into an indispensable element of support for agricultural inputs.
Key types of fertilizers encompass nitrogenous variants such as Urea, Ammonium Nitrate, and Ammonium Sulphate, potassic variations like Potassium Nitrate and Chile Saltpetre, and phosphatic types including Super Phosphate and Triple Phosphate.

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FERTILISER SUBSIDIES IN INDIA

In India, fertilizer subsidies are now allocated to fertilizer companies based on the receipt of fertilizer at recognized warehouses in districts.
These subsidies are distributed to manufacturers based on their actual sales. Farmers benefit from purchasing fertilizers at a Maximum Retail Price (MRP) that is lower than the regular market rates or the cost of production/import.
For instance, the government sets the MRP of neem-coated urea at Rs 5,922.22 per tonne, whereas the average cost-plus price charged to local producers and imports is approximately Rs 17,000 and Rs 23,000 per tonne, respectively.
The disparity between the MRP and the actual cost is subsidized by the Center.
As for non-urea fertilizers, their MRPs are either decontrolled or determined by the firms themselves. However, the
Center provides a fixed per-tonne subsidy to ensure that these nutrients are priced at appropriate levels.
Consequently, decontrolled fertilizers are sold at higher retail prices compared to urea, yet they attract lower subsidies.

WORKING MECHANISM

The mechanism of subsidies in India underwent a significant change in March 2018 with the introduction of a new direct benefit transfer (DBT) system.
Under this system, subsidy payments to fertilizer companies are initiated only when shops make actual purchases to farmers.
Each store is equipped with a point-of-sale (PoS) machine linked to the Fertilisers Department’s e-Urvarak DBT site.
To avail subsidized fertilizer, individuals must provide either their Aadhaar or Kisan Credit Card (KCC) number.
Subsidies can only be claimed by a company once the sale is registered on the e-Urvarak platform.
Subsidy claims are processed weekly and disbursed electronically to the company’s bank account.
Additionally, the New Urea Policy-2015 was introduced with various objectives, including boosting indigenous urea production, promoting energy efficiency, and reducing the subsidy burden.
Furthermore, the government has implemented the Nutrient Based Subsidy (NBS) scheme for phosphate (P) and potash (K) fertilizers. Under this scheme, a fixed amount of subsidy is provided based on the nutrient content of the fertilizers.

FERTILISER POLICIES IN INDIA

Fertilizer Policies in India have been under the purview of the Union Government, with the fertilizer industry listed in the First Schedule of Industries (Development and Regulation) Act, 1951 at Entry 52 of List I and Entry 33 of List III.
Urea dominates the sector, and the focus of fertilizer policy has primarily been on major (macro) nutrients.
Since independence, the Government of India has been regulating the sale, pricing, and quality of fertilizers, designating them as a critical commodity.
The Fertiliser Control Order (FCO) was issued under the Essential Commodities Act of 1957 to manage the distribution and pricing of fertilizers.
Until 1977, with the exception of potash, which received a one-year subsidy, no subsidies were provided on fertilizers.
In 1977, the Retention Pricing Scheme (RPS) was introduced for nitrogenous fertilizers, subsequently expanded to include phosphatic and potassium fertilizers, including imported ones.
Under this scheme, each industrial unit received the difference between the retention price determined by the government (plus a 12% post-tax return on net value) and the statutorily announced selling price, as a subsidy.
This marked the inception of the “Product-based subsidy” system.

Nutrient Based Subsidy (NBS) Policy, 2010

The Nutrient Based Subsidy (NBS) Policy, introduced in 2010, operates on a yearly basis, determining subsidies based on the nutrient composition (N, P, K, S, etc.) of fertilizers.
Under this scheme, manufacturers and marketers are allowed to set a reasonable Maximum Retail Price (MRP).
The objective is to ensure a steady supply of Phosphatic and Potassic (P&K) fertilizers to farmers at fixed costs, promoting agricultural development and balanced soil nutrition.
Managed by the Department of Fertilisers within the Ministry of Chemicals and Fertilisers, the NBS scheme aims to enhance agricultural production, expand the indigenous fertilizer sector, and alleviate the subsidy burden.
The recent extension of the NBS until 2019-20 by the Cabinet Committee on Economic Affairs underscores its importance in agricultural policy.

Neem Coated Urea Policy, 2015

The Neem Coated Urea Policy, introduced in 2015, mandates domestic fertilizer companies to coat at least 75% of their urea production with neem.
This requirement, increased from the previous 35%, aims to mitigate the adverse effects of urea overuse on soil health and overall agricultural productivity.
Additionally, firms are permitted to levy a 5% surcharge on neem-coated urea.
The policy’s objectives include boosting indigenous urea production, enhancing energy efficiency in manufacturing processes, reducing the government’s subsidy outlay, preventing urea diversion for industrial purposes, and promoting environmental sustainability.

New Urea Policy, 2015

The New Urea Policy, effective from 2015 to 2019, aims to incentivize domestic urea production and streamline the distribution of Phosphatic and Potassic fertilizers.
Given India’s significant reliance on urea imports, the policy seeks to enhance indigenous production to reduce import dependence and the government’s subsidy burden.
Emphasizing energy efficiency and technological advancements in urea manufacturing, the policy aims to modernize production facilities and promote environmental sustainability.
The policy also introduces measures to rationalize subsidy expenditures, ensure timely delivery of urea to farmers, and promote fair competition among fertilizer companies.
The “One Nation One Fertiliser” initiative mandates uniform branding for fertilizers across the country, streamlining subsidies and distribution channels while enhancing transparency and accountability in the fertilizer sector.

FAQs – Fertiliser Subsidies and Their Consequences

1-What are fertilizer subsidies, and why are they important in India?

A: Fertiliser subsidies are financial incentives provided by the government to farmers or fertilizer manufacturers to lower the cost of fertilizers. In India, they are crucial for promoting agricultural productivity and ensuring food security by making fertilizers more affordable and accessible to farmers.

2-How are fertilizer subsidies allocated in India?

A: Fertiliser subsidies in India are allocated to fertilizer companies based on the receipt of fertilizer at recognized warehouses in districts. Subsidies are then distributed to manufacturers based on their actual sales. Farmers purchase fertilizers at a Maximum Retail Price (MRP) set by the government, which is lower than market rates or the cost of production/import.

3-What are the consequences of fertilizer subsidies on the agricultural sector?

A: Fertiliser subsidies play a significant role in boosting agricultural production and ensuring soil fertility by encouraging farmers to use fertilizers. However, they also pose challenges such as fiscal burden on the government, potential environmental degradation due to overuse, and disparities in the pricing of different types of fertilizers.

4-How has the mechanism of fertilizer subsidies changed in recent years in India?

A: The introduction of the direct benefit transfer (DBT) system in 2018 marked a significant change in the mechanism of fertilizer subsidies in India. Under this system, subsidy payments are made to fertilizer companies only upon actual purchases by farmers, facilitated through a point-of-sale (PoS) machine linked to government databases.

5-What are the key policies governing fertilizer subsidies in India?

A: The Nutrient Based Subsidy (NBS) Policy, Neem Coated Urea Policy, and New Urea Policy are among the key policies governing fertilizer subsidies in India. These policies aim to promote balanced fertilizer use, enhance indigenous production, reduce subsidy burdens, and ensure environmental sustainability in the agricultural sector.

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Fertilizer Subsidies and Consequences – UPSC Environment Notes