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Subsidy on fertilizers

Subsidy on fertilizers

In News

An inter-ministerial committee has recently recommended revision of nutrient-based subsidy rates for nutrients nitrogen, phosphorous, potassium and sulphur for kharif 2022.

About the News

  • In Union Budget 2022-23, the government allocated amount of Rs 1.09 lakh crore for fertiliser subsidy — Rs 42,000 crore for P&K fertiliser and Rs 67,187 lakh crore for urea.
  • The new rates will be based on average international prices of fertilizers in March 2022 as a special case this year.
  • Assurance of revised subsidy in line with the surge in global prices and is expected to calm the market which has seen worries of protracted disruptions in key commodities that has rattled global commodity and financial markets post Ukraine crisis.

 What is fertiliser subsidy?

  • Mechanism: The subsidy goes to fertiliser companies, although its ultimate beneficiary is the farmer who pays MRPs less than the market-determined rates.
  • Beneficiary: Farmers buy fertilisers at MRPs (maximum retail price) below their normal supply-and-demand-based market rates or what it costs to produce/import them.
  • Urea fertilisers: The MRP of neem-coated urea is fixed by the government at Rs 5,922.22 per tonne, whereas its average cost-plus price payable to domestic manufacturers and importers comes to around Rs 17,000 and Rs 23,000 per tonne, respectively.
  • Non-urea fertilisers: The MRPs of non-urea fertilisers are decontrolled or fixed by the companies. The Centre, however, pays a flat per-tonne subsidy.

 What are the major findings of the panel?

  • Demand and supply: According to the fertilizer department, against the total estimated fertiliser requirement of 354.34 lakh tonne during the 2022 kharif season, availability would be 485.59 lakh tonne, including imported and domestically manufactured fertilizer.
  • Surge in prices: As per market stats the international prices of fertilizers and raw materials have been constantly rising since January 2021.
  • Price burden: In the case of non-urea fertilizers like phosphorous and potash, where the subsidy component is fixed, an increase in cost would translate to the retail price paid by the farmer, unless the subsidy is increased.
  • Major factors: Reduction in phosphorous exports from China and Russia-Ukraine war have contributed to a price surge globally in recent times.
  • Climate factor: Fertilizer supply concerns have come in the backdrop of a heat stress which is affecting North Indian farmers, impacting wheat output.

 What are the Challenges faced by the sector?

  • Heavy imports due to lack of domestic production: India is a large agricultural hub around the globe and yet majority of the total demand for fertilizer is met by imports.
    • Poor infrastructure: A major portion is being imported because there haven’t been any breakthrough advances in the technologies used in the industry coupled with high production cost.
  • Low Yield Due to Wrong Usages of NPK: The way Government is advancing farming, it has turned into a round of just three chemicals-NPK (nitrogen, phosphorus and potassium).
    • Over usage: The greatest challenge in agriculture is the over usage of fertilizers. Urea being modest to buy is utilized by farmers increasingly that makes irregularity because of which the yield goes down.
    • Over exploitation: In 1950, with the utilization of less NPK, the yield was more. Presently, with the utilization of more NPK, lesser yield is being delivered. There is a need to enhance the organic element of the soil through natural farming.
  • Raw Material Availability and Pricing: The primary cause of fertilizer price fluctuations is related to the supply and demand factors.
    • Poor resources: India faces a handicap due to lack of natural resources required to produce fertilizers. In case of urea, there is not enough natural gas available in the country.
    • Input tax burden: Farmers are taxed on other inputs including diesel cost and in addition, farmers pay goods and service tax (GST) on inputs, ranging from 12% on tractors, agricultural implements, pumps and drip/sprinkler irrigation systems to 18% on crop protection chemicals.
    • No tax reclaims: Fertiliser itself is taxed at 5%. Since there’s no GST on farm produce, they cannot claim any input tax credit on their sales, unlike other businessmen.
  • Distributors and Retailers: The demand for specialty fertilizers is growing at a very fast rate. While the overall sales for various grades of water-soluble fertilizers are growing at a significant pace, yet some companies in the Indian market are facing major challenges due to the decline sales in the respective grade.

 Government Efforts to support the Sector

  • Concession Scheme for P&K Fertilizers: The main purpose of this Scheme is to provide P&K fertilizers to the farmers at affordable prices and to increase the food products in the country through the balanced use of fertilizers. 
    • To ensure a reasonable rate of return on the investments made by the entrepreneurs in the fertilizer sector.
  • Nutrient Based Subsidy (NBS): Under the NBS Policy, a fixed rate of subsidy (on Rs. per Kg basis) is announced on nutrients like Nitrogen (N), Phosphate (P), Potash (K), and Sulphur (S) by the Government on annual basis.
    • At present 22 grades of P&K fertilizers namely DAP, MAP, TSP, MOP, Ammonium Sulphate, SSP and 16 grades of NPKS complex fertilizers are covered under the NBS Policy.  MRP of P&K fertilizers has been left open and fertilizer manufacturers or marketers are allowed to fix the MRP at reasonable rates.
  • New payment system: Being super-subsidised, urea is always prone to diversion for non-agricultural use — as a binder by plywood/particle board makers, cheap protein source by animal feed manufacturers or adulterant by milk vendors — apart from being smuggled to Nepal and Bangladesh.
    • DBT: In an attempt to curb such diversions, the government has proposed Direct Benefit Transfer through POS machines and subject to the buyers’ biometric authentication to beneficiaries.

Conclusion: The time has come to seriously consider paying farmers a flat per-acre cash subsidy that they can use to purchase any fertiliser. The amount could vary, depending on the number of crops grown and whether the land is irrigated or not. This is, perhaps, the only sustainable solution to prevent diversion and also encourage judicious application of fertilisers, with the right nutrient (macro and micro) combination based on proper soil testing and crop-specific requirements.

Question: Fertilizer subsidy is an important component of Indian agriculture. Discuss. What are the challenges faced by fertiliser sector?

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