[Editorial] Reforming the Fertilizer Sector

How have the fertilizer prices changes over the years?

  • According to 1991-92 Economic Survey, the fertilizer prices remained unchanged between July 1981 and July 1991.
  • In July 1991, the Union Budget increased the fertilizer issue prices by 40%. In August 1991, it was reduced to 30%.
  • Small and marginal farmers were exempted from this price increase.
  • A year later, the price increase for urea was rolled back to 17% over the pre-reform price due to opposition to the increase in prices.

How has the government been subsidizing fertilizers?

  • The Economic Survey noted the substantial subsidization of fertilizers despite the 30% increase in issue price in 1991. It called for a reduction in subsidy.
  • Over the past decades, there has been an uncontrolled rise in urea subsidization.
  • This is due to:
    • Near freezing of urea’s MRP at different times
    • Increasing sale of urea resulting in its indiscriminate use.
  • In 3 years, there has been a doubling of fertilizer subsidies. In 2017-18, the fertilizer subsidy was ₹66,468 crore while the union budget estimated ₹79,530 crore for 2021-22. The 2021-22 numbers are expected to be higher, due to:
    • Recent increase in energy prices
    • Increase in international prices of fertilizers
    • India’s import dependence

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What was the fallout?

  • The change of urea pricing altered the relative prices of different fertilizers.
  • This resulted in a significant shift in the composition of fertilizer use in favour of urea (an important source of nitrogen).
  • In 1991-91, the N:P:K ratio was 5.9:2.4:1. This changed to 9.7:2.9:1 in 1993-94.
  • The policy and price changes disturbed the favourable trend of farmers moving towards a balanced use of fertilizers.
  • The fertilizer use/ hectare of cultivated area varied between 70 kg of NPK in Rajasthan and 250 kg of NPK in Telangana, in 2019-20. This gap is wider at district level.
  • The composition has also varied across the states- eg: 33.7:8.0:1 in Punjab and 1.3:0.7:1 in Kerala.
  • The variations in subsidy content (highly biased towards nitrogen) have effected inter-State variation in fertilizer subsidy.
  • The fertilizer subsidy magnitude among major states is in the range of 8:1 ratio.

What are some attempts to reform the fertilizer sector?

  • Several attempts have been made to reform the sector since 1991.
  • These reforms sought to:
    • Check the fertilizer subsidy bills
    • Promote fertilizer use efficiency
    • Achieve a balance in use of nitrogen, phosphorus and potassium (N, P and K)
    • Reduce pollution of air and water due to fertilizers
  • The Nutrient Based Subsidy/ NBS was introduced in 2010 to address the imbalanced use of fertilizers.

What are the challenges?

  • The NBS had failed to include urea under its ambit. It covered only non-nitrogenous fertilizers– especially when the imbalanced fertilizer use is skewed towards nitrogen-based fertilizers like urea.

Demand-supply mismatch:

  • Urea: the total demand is 34-35 million tonnes (mln t) but the domestic production is 25 mln t. The remaining 9-10 mln t is imported.
  • Diammonium Phosphate/ DAP: total demand of 12 mln t against a domestic production of merely 5 mln t. The remaining 7 mln t is met through imports.
  • Muriate of Potash: there is a demand of 3 mln t– which is met entirely through imports.
  • Complex fertilizers: consumption is 12-13 mln t. This is largely produced domestically with only 1 mln t being imported.

International prices of fertilizers:

  • The international fertilizer prices are volatile. They are almost directly proportional to prices of energy.
  • The major global producers have a strong influence on fertilizer prices due to cartelization.
  • The urea price recently surged to a record $900 per metric tonne in November from $270 per metric tonne in September.
  • The DAP prices increased from $360 per mt in September to $825 per mt in November.
  • These extraordinary increases are due to:
    • Rise in in international energy prices
    • Robust domestic demand in producer countries leading to supply constraints
    • Production cuts
    • Export restriction
    • Coincidence with Rabi season

Fiscal challenges:

  • To minimize the impact of this price rise on farmers, the government absorbs the bulk of the impact by enhancing fertilizer subsidy. This will lead to serious fiscal challenges.
  • In last 2 decades, urea price per kg increased from ₹4.60 in 2001 to ₹5.36 in 2021. During this period, the MSP of paddy increased by 280% and of wheat by 230%.
  • This implies that 37.7 kg of wheat could buy a 50 kg bag of urea in 2001 but the same quantity of wheat can only buy 13.3 kg.
  • Currently, for a bag of urea, the farmers pay ₹268 while the government pays a subsidy of ₹930.
  • This means that the taxpayer bears 78% of the cost while the farmer bears only 22%.
  • This is expected to increase- and that isn’t sustainable.

What is the way ahead?

  • There is a need to work on 4 key policy areas simultaneously:

Self-reliance:

  • Need to ensure self-reliance and reduce import dependence for fertilizers.
  • The recent steps to revive the 5 urea plants at Gorakhpur, Sindri, Barauni, Talcher and Ramagundam will help in this direction.

Addressing skew towards urea:

  • Need to extend the NBS model to nitrogen-based fertilizers (urea).
  • Price rationalization of urea compared to non-nitrogenous fertilizers and crop prices must be allowed.
  • A rational formula must be used to distribute price change in urea over prices and subsidy instead of keeping the price fixed and absorbing all the changes in the subsidy part.

Reducing dependence on chemical fertilizers:

  • Need to develop alternative nutritional sources for plants.
  • Farmers and consumers have a desire to shift to non-chemical fertilizers.
  • Some have suggested shifting to organic fertilizers and biofertilizers instead of chemical fertilizers.
  • There is a growing demand for incentives, like subsidies, for such sustainable fertilizer alternatives.
  • Need to focus on scaling up the use of alternative fertilizers.
  • Innovation in developing such alternatives must be encouraged. Eg: use of available technology to enhance the nitrogen content in compost can help.

Improving fertilizer efficiency:

  • Promoting need-based use instead of broadcasting the fertilizers.
  • Nano urea, developed by IFFCO, has the potential to reduce urea use.
  • Similar products must be tested and promoted.

Conclusion:

Reforming the fertilizer sector through these changes will help enhance agricultural productivity, mitigate climate change, provide alternatives to agricultural chemicals and balance the fiscal burden of subsidies on the Union Budget.

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