fertiliser subcidy in india

8/13/2019 fertiliser subcidy in india

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An Analysis ofFertilizer Subsidy Regimes in India

Seminar Teachers:Dr. T.N. PrakashSri. P.S. Srikantamurthy

By:

Arun, M.,PAK 9001/0008II Ph.D., 2NDSeminar


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Scheme of presentation

Introduction

World Fertilizer Market & Prices

Pricing Policy Framework and Reforms

Indias Position in World Markets

Rising Fertilizer Subsidies the Beneficiaries

Equity Issues in the Distribution of Fertilizers

Nutrient based fertilizer Subsidy in India Price Sensitiveness of NBS Policy on Fertilizer

Consumption

Conclusions & Policy Implications


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Introduction

Production and Market support to thefarmers.

Production: Improved & HY varieties arecontinuously being developed, R&D in allthe departments are funded and promoted.

Market: Contract farming, futures trading

and insurance, apart from fertilizer, water,power and credit subsidies provided.


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Fertilizers- the key inputs

Fertilizers, the key inputs in agriculture, eversince HYVs are introduced.

Boosts agriculture production with key

components of N, P & K apart from otherminor nutrients.

Sourceboth domestic production andimported


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World Market

price determination in any industry - Inperfect markets, prices will be determined bythe forces of supply and demand, but theinternational fertilizer market is not a perfectmarket.

The production, demand and supply are

concentrated in a few nations of the worldand the prices are in their control.


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Table 1: Concentration of World Fertilizer Production,Consumption and Trade (2007-08)

Product/

NutrientsCountries

% Share of

Top 10 in

World

Consumption

N China (34.8%), India (15.5%), US (12.4%), Pakistan

(2.8%), Indonesia (2.8%)

78.9

P China (31.5%), India (15.8%), US (11.3%), Brazil (9.7%)

Pakistan (2.7%)

80.3

K China (24.0%), US (17.3%), Brazil (15.2%) India (9.8%),Malaysia (3.9%)

81.3

N+P+K China (32.2%), India (14.6%), US (13.0%), Brazil (6.5%),

Indonesia (2.5%) - 68.8%78.1

Production

N China (26.9%), India (8.8%), Russia (7.7%), US (6.0%),

Indonesia (3.6%)

66.6

P US (21.0%), China (18.5%), Morocco (8.4%), Russia

(7.4%), India(5.5%)

73.8

K Canada (39.6%), Russia (12.7%), Belarus (11.1%),

Germany (8.7%), US (5.6%)

95.0

N+P+K China (24.3%), Canada (10.4%), Russia (9.7%), US(9.5%), India (7.6%) -61.5%

75.9

Contd..


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Exports

Urea China (16.1%), Russia (12.7%), Saudi Arabia

(9.4%), Ukraine (9.3%), Qatar (7.7%) -55.2%77.0

Ammonia Trinidad (25.2%), Russia (18.7%), Ukraine(7.6%), Indonesia (7.3%), Canada (5.1%) -63.9% 81.1

MAP and

DAP

and US (33.8%), China (21.1%), Russia (19.2%),

Morocco (9.0%), DAP Tunisia (5.3%) -88.4%98.8

Potash Canada (38.6%), Belarus & Russia (36.3%),

Germany (11.2%), Israel (7.6%), Jordan (3.7%) -

97.4%

100.0

Imports

Urea India (18.0%), US (17.5%), Brazil (6.1%),

Thailand (4.9%), Turkey (4.4%) -50.9%

64.8

Ammonia US (40.5%), India (9.2%), Korea Republic (5.7%),France (4.3%), China (3.9%) -63.6% 77.4

MAP and

DAP

India (15.5%), Brazil (15.1%), Pakistan (7.6%),

Argentina (6.6%), Canada (4.5%) -49.3%66.4

Potash China (15.1%), US (12.7%), Brazil (11.5%), India

(6.4%), Malaysia (2.9%) -48.6%57.7

Source: Sharma, V.P., and Thaker, H., 2010


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Table 2: Market Power of Top FiveGlobal Fertilizer Companies

CompanyMarket Power

Nitrogen (N) Phosphate (P) Potash (K)

Yara (Norway) ++++ ++ +

Mosaic (US) ++ ++++ +++

Agrium (Canada) +++ ++ ++

PotashCorp (Canada) ++ ++ ++++

Note: ++++ very strong presence; +++ strong; ++ low; + no market presence.Source: Sharma, V.P., and Thaker, H., 2010

Yara: 8 mTammonia, 6 mT NitrateMosaic: 9.4 mT-Phosphate (larger than aggregate of next 3 largest producers)

2ndlargest in Potash -10.4 mT

Top 5 producers produced - 22% in 2002; 33% in 2007


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Table 3: Trends in International Prices of Urea,DAP and MOP ($/Ton Product Bulk, January 1990 -September 2008)

Product Minimum Maximum Average Coefficientof Variation

(%)

CAGR(%/

Annum)

Urea (fob

Middle East)70(July-

Dec 1998)865(July-

Sep 2008)

200 63.5 2.64

DAP (fob US,

Gulf)110 (Jan-

June 1993)1,230(Apr-

June 2008)

270 83.6 2.77

MOP (fob

Vancouver)80 (Jan-

June 1993)

945 (July-

Sep 2008)

160 70.7 2.46


Urea: Average FOB price during the decade of 1990s $135; decade of 2000- $260/ton.DAP: Average FOB price during the decade of 1990s $177; decade of 2000- $422/tonMOP: Average FOB price during the decade of 1990s $111; decade of 2000- $288/ton


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Pricing Policy - India

Fertilizer Control Order1944; made effective

from 1957.

This enabled Govt. to statutorily fix & controlfertilizer prices.

Selling priceCost of production anddistribution was paid to the manufacturers =Subsidy.

Determining the extent of such amountassumed the name Retention Price andSubsidy Scheme (RPS) in 1977.


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Objective of RPS

To encourage domestic production of of fertilizers byensuring a reasonable rate of return on theirinvestment.

Initially it covered domestic production of urea, AS, &CAN.

In 1979, the RPS was extended to cover P fertilizers.

The same year the equated freight schemewas

introduced to ensure an even distribution of fertilizers inthe country.

The Retention Price Scheme, as recognized by many,as 'proving and claiming of costs' rather than controllingthem.


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Committees suggesting Reform 1976: Fertilizer Prices Committee (FPC) under S. S. Marathe

to suggest a policy of fertilizer pricing that would give manufacturers,a sustained fair return on their investment; and

to develop norms for calculating costs and retention prices ofvarious products and based on different feedstock.

Suggestion: rather than cost-plus formula, retention prices should bebased on certain norms of input consumption and capacityutilization. So, FPC recommended a group-wise scheme.

However, the government chose to introduce the RPS as a unit-wisescheme.

1986: High Powered Committee of Secretaries on RPS -B. Singh Recommended the use of group retention prices and an eventual

transition to a uniform price over a period of time. The Committee also suggested a tariff adjusted import parity price

for new gas-based plants. Its recommendations were, however,rejected by the government.


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1987: High Powered Committee on Fertilizer Consumer Prices . Suggested an increase in the farmgate prices of fertilizers by 5-7

per cent if the cumulative growth in fertilizer consumption is morethan 30 per cent in three years. These were again turned downby the government.

August 1992, the JPC stated that the RPS provided no incentiveto fertilizer plants to optimize capital costs of plants.

In particular, the Committee suggested that a cut off point of 110per cent capacity utilization should be fixed for capital-relatedcharges for gas-based nitrogenous plants. This was never putinto practice.

A committee of experts to review the RPS - Hanumantha RaoCommittee on fertilizer pricing was constituted as a result of JPCreport.


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Price increase and uproar

July 1991: Government tried to raise urea price by 40 percent(from Rs.

2350 per tonne to Rs 3300 per tonne). fertilizers with lower nitrogen content than urea and DAP,

including AS, CAN and ammonium chloride were decontrolled.

August 1991: because of political uproar, urea price was reducedto Rs 3060 per tonne, making the effective increase only 30 percent.

August 1992: JPC recommended decontrol of P & K fertilizerprices and reducing urea price by 10 per cent.

On 25 August 1992: Decontrolled P & K sector. P and K fertilizer prices shot up by more than 100 per cent whilethe urea price came down to Rs. 2760per tonne.

To contain the rising prices of P and K fertilizers, the imports ofDAP were decanalized in September 1992and their importswere placed under the Open General License.


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As a result of unrestricted imports of DAP, 8 out of11 plants in the country had almost come to agrinding halt.

In response to the industry protest, the government

introduced a flat rate subsidy of Rs 1000 per tonneon DAP and MOP in September 1992.

The RPS did achieve its objective of developing a

large domestic industry, achieving near self-sufficiency in fertilizer production and increasingconsumption of chemical fertilizers

but was criticized of promoting inefficiency, leadingto a huge burden of subsidies.


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High Powered Fertilizer Pricing PolicyReview Committee - C.H. Hanumantarao

Accused RPS policy of providing for over capacity

utilization, thus accumulated capital costs beingtransferred to govt. through subsidy.

Promotes low cost, inefficient old units and hurdles, new,high cost, efficient ones.

Suggestion: shift to cheaper raw material to keep thecost of production low, like from naptha to gas, coal, fueloil, etc.,

Phased deregulation of fertilizer sectorpromotetechnological and managerial innovations.

No uniform price for urea.

Pricing methodology followed for urea should be

extended to DAP also.


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A phased programme for attaining totaldecontrol

Phase-I : 20002001 and 2001-2002

Increase in the price of urea at regular intervals

Improvement in the implementation of theconcession scheme


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Decision on fertilizer pricing policy

Urea, being the only fertilizer under statutory price, distribution andmovement control, is covered under (RPS).

Recommendation: dismantling of RPS and adoption of a uniformNormative Referral Price (NRP).

The natural gas based units, the naphtha and LSHS/Fuel Oil basedunits would get a feedstock cost differential reimbursementonaccount of their higher feedstock prices for a period of 5 years during

which they would be expected to switch over to LNG which is thecheapest and most efficient feedstock.


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Phase-II (2002-032003-04)

Creation of new capacities - Long term perspective

protection to indigenous industry

Phase-III (2004-052006-07)

Withdrawal of the MRP and Concession Scheme: Total decontrol with a view to allow operation of freemarket forces could be introduced during the year 2005-06. The emphasis will be only on structural improvementsin the agricultural sector and improvement of the non-farm

rural sector. The concession scheme, extended to urea in Phase-II, will

have to be withdrawn in Phase-III. The scheme canperhaps be withdrawn by the end of the year 2007 and

thereafter the market forces will have a free play.


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April 2003: New Pricing Scheme (NPS) for ureaunits was implemented in a phased manner, with anobjective to bring transparency, uniformity,

efficiency, and reduce the cost of production. This seems to have reduced the quantum of fertilizer

subsidy amounts during 2002-03 and 2003-04.

Based on the recommendations of Export Group on

P & K fertilizers, a policy for these products wasimplemented.

Table 4: Fertilizer Consumption Production Imports


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Table 4: Fertilizer Consumption, Production, Importsand Subsidies in India

Years

Consumption Production Imports FertilizerSubsidie

s (@93-

94 & 99-00

series)N P K Total N P K Total N P K Total

1991-92 80.46 33.21 13.61 127.28 73.01 25.62 0 98.63 5.66 9.67 12.36 27.69 5,185

1992-93 84.26 28.43 8.84 121.53 74.3 23.06 0 97.36 11.56 7.38 10.82 29.76 5,796

1993-94 87.88 26.69 9.09 123.66 72.31 18.16 0 90.47 15.88 7.22 8.57 31.67 4,562

1994-95 95.07 29.32 11.25 135.64 79.45 24.93 0 104.38 14.76 3.8 11.09 29.65 5,769

1995-96 98.23 28.98 11.56 138.77 87.77 25.58 0 113.35 19.93 6.47 13.15 39.55 6,735

1996-97 103.01 29.77 10.3 143.08 85.99 25.56 0 111.55 11.71 2.55 6.07 20.33 7,578

1997-98 109.01 39.14 13.73 161.88 100.86 29.76 0 130.62 13.62 6.72 11.4 31.74 9,918

1998-99 113.54 41.12 13.32 167.98 104.8 31.41 0 136.21 6.35 9.68 15.42 31.45 11,596

1999-00 115.92 47.99 16.78 180.69 108.9 33.98 0 142.88 8.33 15.34 16.48 40.15 13,244

2000-01 109.2 42.15 15.67 167.02 109.61 37.43 0 147.04 1.64 4.37 16.27 22.28 13,800

2001-02 113.1 43.82 16.67 173.59 107.68 38.6 0 146.28 2.83 4.94 16.97 24.74 12,595

2002-03 104.741 40.19 16.01 160.94 105.62 39.06 0 144.69 1.35 2.28 15.68 19.31 11,015

2003-04 110.77 41.24 15.98 167.99 106.34 36.31 0 142.65 2.05 3.72 15.53 21.3 11,847

2004-05 117.139 46.24 20.61 183.98 113.33 39.97 0 153.3 4.13 3.07 20.58 27.78 15,879

2005-06 127.233 52.03 24.13 203.4 113.54 42.21 0 155.75 13.9 11.45 27.64 52.99 18,460

2006-07 137.729 55.43 23.35 216.51 115.77 45.17 0 160.94 27.04 13.73 20.76 61.53 26,222

2007-08 144.191 55.15 26.36 225.7 108.99 38.06 0 147.06 NA NA NA NA 32,490

(lakh tons, Crore Rupees)

Sources: Compiled from Department of Agriculture, Department of Fertilizers, GOI.


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Figure 1: Trends in Fertilizer Production andConsumption in India (1950-51 to 2007-08)

Source: FAI, 2008


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Table 5: Major Subsidies in India: 1990-91 to 2008-09

Year FoodIndigenous

UreaImported Urea

Decontrolled

FertilizersTotal

FertilizersTotal

Subsidies

1990-91

(% to total subsidy)2,450 (20.15) 3,730

(30.68)659

(5.42) 4,389 (36.10) 12,158

(100.00)

1991-92 2,850 3,500 1,300 5,185 12,253

1992-93 2,800 4,800 996 5,796 11,995

1993-94 5,537 3,800 762 4,562 11,605

1994-95 5,100 4,075 1,166 528 5,769 11,854

1995-96 5,377 4,300 1,935 500 6,735 12,666

1996-97 6,066 4,743 1,163 1,672 7,578 15,4991997-98 7,900 6,600 722 2,596 9,918 18,540

1998-99 9,100 7,473 333 3,790 11,596 23,593

1999-00 9,434 8,670 74 4,500 13,244 24,487

2000-01 12,060 9,480 1 4,319 13,800 26,838

2001-02 17,499 8,044 47 4,504 12,595 31,210

2002-03 24,176 7,790

3,225 11,015 43,533

2003-04 25,181 8,521 3,326 11,847 44,323

2004-05 25,798 10,243 494 5,142 15,879 45,957

2005-06 23,077 10,653 1,211 6,596 18,460 47,522

2006-07 24,014 12,650 3,274 10,298 26,222 57,125

2007-08 31,328 12,950 6,606 12,934 32,490 70,926

2008-09 (RE)(% to total subsidy)

43,627(33.76)

16,517(12.78)

10,981(8.50)

48,351(37.41)

75,849(58.69)

1,29,243(100) S

ource:Sharma,

V.P.,andThake

r,H.,2010

(crore rupees)

CAGR:16

.9%

CAGR:12.9%


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Figure 2: Trends in Food andFertilizer Subsidies in India.


Food Subsidy: 0.41% to 1.02% of GDPFertilizer Subsidy: 0.9% to 1.5% of GDP


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Why fertilizer Subsidy and itsrationalization?

to provide fertilizers at stable and affordable prices &increase agricultural production through higherfertilizer use, and

to encourage domestic production by allowingfertilizer producers a reasonable return on theirinvestments.

Thus benefiting both the groups, producers and theconsumers.

The high figures of fertilizer subsidy and its highshare in total subsidies, speaks the need for therationalization of subsidy regime in the country.

Having given sufficient time for the domestic

industries, it is time now to rationalize the subsidies.


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Before making any changes insubsidy policy.

Policy makers need to first determine the actualbeneficiariesand where the burden of adjustmentwould fall, if one were to phase out fertilizer subsidy.

Efficiency of Indian fertilizer industry vis-a-visimported fertilizers.Pertinent to urea segment offertilizer industry as it was under the RPS and ureaimports remain 'canalized'.

Finally, what would be the impact on agriculturalproductionif one were to reduce/abolish fertilizersubsidies?


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Table 6: Farmers Share in Fertilizer Subsidy

Source: Gulati, A., and Narayanan, S., 2002

Particular TE83-84

TE86-87

TE89-90

TE92-93

TE95-96

TE98-99

1999-00 2000-01

Per ton subsidy going to farmers on IPP basis

Urea (Rs./ton) 258 590 700 2002 3669 3033 1098 2269

DAP (Rs./ton) -347 243 93 231 -562 1701 2330 1128

MOP (Rs./ton) 438 512 1037 1212 786 2639 4042 3885Total subsidy on

(N+P+K) (Rs. Million)

[per ton subsidy X

consumption]

1654 8424 17616 37772 69779 87029 61218 81266

Fertilizer subsidy as

per budget (Rs.Million)

6740 19160 33187 49950 54587 96973 132440 126510

Share of budgetary

subsidy going to

farmers

24.54 43.97 53.08 75.62 127.83 89.75 46.22 64.24


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Indias Position in World

Markets

Source: FAI, 2008


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Figure 4: Imputed Subsidy per ton of UreaImported and Indigenously produced

Source: FAI, 2008

During 9 out of 13 years, imported subsidy figures higher than that ofindigenous production

Fi 5 Sh f I t d d I di


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Figure 5: Share of Imported and IndigenousUrea in Total Subsidy on Urea

Source: FAI, 2008

International Prices of Urea were not always lesser than that of domesticproduction

But we cannot say domestic production of urea is efficient Natural Gas is efficient, Naptha, FO/LSHS, Mixed Feed Stock

attract more subsidy due to their relative less efficiency inproduction.


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Figure 6: Natural Gas allocation for Fertilizerand Energy Sectors (%)

Source: FAI, 2008

Gas as feed stock in fertilizer production accounted for about 50%during 2001-02

2006-07: supply shortfall of 24.8%, hence the rest was metthrough other feed stock source

P tt f F t i li C t i b F Si


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Pattern of Fert i lizer Consumption by Farm Size

Table 7: Pattern of Fertilizer Consumption by FarmSize in India

YearMarginal

(10 ha)All

Households

Distribution of holdings (%)

1991-92 57.1 20.3 13.7 7.3 1.6 100.0

1996-97 60.7 18.9 12.5 6.5 1.4 100.0

2001-02 64.0 18.2 11.0 5.6 1.2 100.0

Share in gross cropped area (%)

1991-92 17.3 19.6 23.8 25.8 13.5 100.0

1996-97 19.0 19.1 23.5 25.1 13.3 100.0

2001-02 22.3 20.3 22.8 22.9 11.7 100.0

Proportion of fertilized area to gross cropped area (%)

1991-92 63.6 62.6 60.9 58.0 46.9 59.1

1996-97 64.1 62.7 60.8 57.4 45.0 58.8

2001-02 77.1 74.2 71.3 65.1 49.7 69.2

Share in total fertilizer consumption (%)

1991-92 20.6 21.1 24.2 23.9 10.2 100.0

1996-97 25.6 20.4 23.0 22.2 8.8 100.0

2001-02 29.9 22.1 22.1 18.9 7.0 100.0 S

ource:Sharma,

V.P.,andThake

r,H.,2010


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Table 8: Pattern of Fertilizer Use Intensity byFarm Size in India

Year Marginal SmallSemi-

mediumMedium Large

All

Househol

ds

Fertilizer consumption per hectare of gross cropped area (kg)

1991-92 72.2 65.5 61.7 56.3 46.0 60.7

1996-97 103.8 82.6 75.3 68.1 51.1 77.1

2001-02 126.2 100.6 88.8 75.8 55.9 92.6

Fertilizer consumption per hectare of fertilizer area (kg)1991-92 113.4 104.6 101.3 97.0 98.1 102.8

1996-97 162.1 131.8 123.9 118.6 113.6 131.1

2001-02 164.7 134.7 122.8 113.3 108.4 131.7


T bl 8 St t i F tili U /H t f G


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Table 8: State-wise Fertilizer Use /Hectare of GrossCropped Area by Size of Holding: 2001-02

States Marginal Small Semi-medium Medium Large All

Andhra Pradesh 171.1 149.0 139.0 128.1 109.6 146.7

Assam 50.4 29.9 24.4 16.1 3.8 30.7Gujarat 104.1 83.0 72.8 59.0 40.4 70.0

Haryana 145.1 126.0 132.6 132.1 118.5 130.7

Himachal Pradesh 61.6 55.9 52.3 47.3 38.9 55.4

Jammu and Kashmir 159.4 71.6 62.4 39.2 30.4 107.9

Karnataka 172.0 122.5 98.5 79.9 62.2 105.1

Kerala 180.8 104.6 108.3 121.2 131.5 152.0

Madhya Pradesh 44.1 33.5 29.3 27.0 24.4 30.0

Maharashtra 143.2 109.8 92.6 82.8 63.8 101.1

Orissa 65.0 56.4 55.8 60.2 63.8 59.1

Punjab 163.3 164.3 166.7 169.5 169.9 168.6

Rajasthan 69.3 46.9 41.9 33.4 16.3 32.6

Tamil Nadu 173.8 140.6 137.4 128.6 90.2 148.6

Uttar Pradesh 120.4 109.3 104.5 95.0 83.5 109.9

West Bengal 130.2 137.5 139.2 107.5 112.3 133.0

All India 126.2 100.6 88.8 75.8 55.9 92.6 S

ource:Sharma,

V.P.,andThake

r,H.,2010


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State wise share in fertilizersubsidy

Nstate-wise Consumption of urea * weightedaverage subsidy on imported and indigenouslyproduced urea (Rs./tonne).

P&Kstate-wise subsidies varied, so amount ofsubsidy was not matching the total subsidy on them,reported in budget.

So, per unit subsidy on P&K =

(tot subsidy/tot consumption during that year)*totconsumption in the state in the year.

Implies, subsidy is in proportion to the consumption

T bl 10 Sh f M j St t i T t l F tili S b id i I di 1992 93


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Table 10: Share of Major States in Total Fertilizer Subsidy in India, 1992-93to 2007-08

State 1992-93 Sum 1999-2000 Sum 2007-08 Sum

Uttar Pradesh 23.2 60 19.5 55.8 17.5 54.5Andhra Pradesh 10.6 10.8 11.3

Maharashtra 8.5 10.3 10.2

Madhya Pradesh 6.2 6.6 7.8

Punjab 11.6 8.6 7.7

Gujarat 5.5 31.7 5.2 34.6 7.0 36.4Karnataka 4.2 6.2 6.5

West Bengal 5.2 6.7 6.4

Bihar 6.0 5.8 6.2

Haryana 5.8 5.3 5.5

Tamil Nadu 5.0 5.4 4.8

Rajasthan 4.2 4.7 4.4

Orissa 1.6 2.0 1.9

Assam 0.2 0.6 1.0

Kerala 0.7 1.0 0.9

Others 0.9 0.5 0.4

Jammu and Kashmir 0.4 0.4 0.4

Himachal Pradesh 0.3 0.2 0.2

(in %)

S

ource:Sharma,

V.P.,andThake

r,H.,2010

Table 11: State-wise Trends in Intensity of


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Table 11: State-wise Trends in Intensity ofFertilizer Subsidy (Rs/ha of GCA)

States 1992-93 1999-2000 2007-08

Punjab 946 1,454 3,924

Andhra Pradesh 512 1,096 3,561Haryana 607 1,164 3,476

Tamil Nadu 430 1,104 3,307

West Bengal 373 931 2,660

Uttar Pradesh 553 981 2,617

Bihar 394 774 2,432

Gujarat 304 651 2,301

Karnataka 207 682 2,107

Maharashtra 247 637 1,829

Jammu and Kashmir 242 457 1,264

Kerala 150 455 1,235

Madhya Pradesh 159 334 1,213Assam 35 206 1,143

Himachal Pradesh 170 277 958

Orissa 102 314 894

Rajasthan 129 322 824

India 331 703 2,083

S

ource:Sharma,

V.P.,andThake

r,H.,2010

Figure 8: Percentage area treated with


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Figure 8: Percentage area treated withfertilizers on Irrigated and Un-irrigated land


Figure 9: Changes (%) in share of irrigated


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Figure 9: Changes (%) in share of irrigatedand un-irrigated areas in consumption offertilizers between 1996-97 and 2001-02.



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Figure 10: Trends in Consumption of fertilizers(N+P+K) on irrigated and un-irrigated land (kg/ha)

42% increase

15% increase


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Table 12: Concentration of Fertilizer Subsidyon Major Crops in India: 2001-02

CropTotal Fertilizer

Used (000

Tons)

TotalSubsidy (Rs

Lakh)

% Share inTotal

Subsidy

Per HaFertilizer Use

(Kg)

Paddy 5,061.7 367.5 32.2 119.4

Wheat 3,189.7 231.6 20.3 130.8

Sugar cane 989.6 71.8 6.3 240.6

Cotton 921.0 66.9 5.9 110.8

Groundnut 465.9 33.8 3.0 74.6

Jowar 443.8 32.2 2.8 60.0

Bajra 304.3 22.1 1.9 29.0

Maize 258.4 18.8 1.6 55.8

Others 4,073.4 295.7 25.9 66.1

All crops 15,707.8 1140.4 100.0 92.6



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Why alternative policy?

In last few years, the marginal response of agricultural productivity toadditional fertilizer usage, has fallen sharply.

Imbalanced NPK application, rising multi-nutrient deficiency and lackof application of organic manures, leading to reduction in carboncontent of the soil, has contributed towards the stagnating

agricultural productivity. Subsidy leads to lack of innovation in fertilizer sector, leading to, very

few products being introduced by fertilizer companies.

The fertilizer industry suffers from low profitability and works in ahighly regulated environment.

Virtually no investments for the past 11 years in urea sector and forover 8 years in P&K sector.

Subsidy outgo of Government has increased exponentially by 530%during 2004-2009 (94% due to - international prices of fertilizers andfertilizer inputs, and only 6% -attributable to increase in

consumption.)

Options considered before finalizing NBS


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Option 1:

Open MRP for all fertilizers

Subsidy on Feed Stocks like NG for Urea units in proportion tothe desired MRP of fertilizers

Option 2:


Fixed subsidy to industry for each of the six groups of Ureamanufacturers.

Option 3:

Fixed Nutrient Based Subsidy with open MRP

Strengthen infrastructure for direct payment of subsidy tofarmers.

Option 4:


Fixed subsidy based on the proposal put forth by

PricewaterhouseCoopers.

Options considered before finalizing NBS


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It would be difficult to ensure that direct transfer ofsubsidy to millions of farmersis actually used by farmers,for only buying fertilizer and there are no leakages in thetransfer of subsidy.

Adversely effect agricultural production in the country.

Using existing mechanism ensures usage of fertilizers byall categories of farmers.

So, direct transfer of subsidy to farmers may not a rightpolicy decision at this point of time.

NBS acts as intermediary arrangement in fertilizersubsidy policy, until necessary infrastructure is created.

Intends to ensure balanced application of nutrients andgrowth of fertilizer industry.

Nutrient based fertilizer Subsidy in India


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Before NBS

Subsidy per ton= nominated delivered cost - MRPs at

which they are required to be sold to the farmers. The normated delivery cost is finalized by Department

of Fertilizers based on pricing parameters approvedunder the New Pricing Scheme (NPS) for indigenousUrea and under the Concession scheme for

Phosphatic and Potassic (P&K) fertilizers. At present, Urea, DAP, MAP, TSP, MOP, AS, SSP

and 12 grades of Complex Fertilizers are coveredunder the fertilizer subsidy regime.

Excess demand over indigenous production is bridgedthrough import of Urea, DAP, MAP, TSP & MOP.

The import of fertilizers is permitted under OGL exceptfor urea, import of which is canalized.

However, importedSSP and ASis not covered under

concession scheme.


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Table 14: Per kg NBS for nutrient 'N' 'P' 'K'and 'S' for 2010-2011 w.e.f. 1st April 2010.

NutrientsNBS (Rs./Kg)

N 23.227

P 26.276

K 24.487

S 1.784

Table 15: Per MT NBS for different


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Table 15: Per MT NBS for differentP&K fertilizers for 2010-2011

Fertilizers NBS per MT

DAP 16268

MAP 16219

TSP 12087

MOP 14692

AS 5195

16:20:0:13 9203

20:20:0: 13 10133

23:23:0:0 11386

10:26:26:0 15521

12:32:16:0 15114

14:28:14:0 14037

14:35:14:0 15877

15:15:15:0 11099


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Recommendations

The first phase of the proposed NBS Policy can beimplemented with effect from 1st April 2010.

The DOF and DAC should discuss with the

Industry and take the written assurance onmaintaining the price line around the current levelfor at least one year.

The NBS should be released through the industry

during the first phase The MRP of Urea should be increased by 10%

w.e.f. 1st April, 2010.

Proposals


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Proposals

The NBS to N, P, K and S - based on the targeted farmgate prices, total allocation of subsidy requirements as

assessed by DAC and the expected international priceof major fertilizers.

Inclusion of new fertilizers is based on application bymanufacturers /importers and need appraisal by lCAR.

Distribution and movement of Fertilizers and inputs willcontinue to be monitored through the on-line web basedFertilizer Monitoring System. (FMS)

Freight subsidy only on rail freight. The road freight -assumed to be part offixed subsidy.


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Printing MRP along with subsidy quantum must. Saleabove RP punishable under the EC Act.

No separate subsidy on fertilizers using already

subsidzed fertilizers as inputs. Additional subsidy(decided by DOF) will be provided to

indigenous Naptha based, complex fertilizersmanufacturersonly for 2 years.

The NBS would be released through the industry during

the first phase. To provide a per ton additional subsidyon subsidized

fertilizers withother secondary or micro nutrients. Second phaseto move towards release of NBS through

retail points. Urea - proposed to be decontrolled. after establishment of

the ICT linkage of retail chain with the respective fertilizercompany and banks, the competent authority will decide.

Table 16: Responsiveness of major N P &


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p j

K fertilizer consumptionAS Urea CAN DAP

Coeff P-value Coeff P-value Coeff P-value Coeff P-value

Intercept -15.91 0.00 -13.20 0.00 -16.51 0.00 -18.30 0.00

Short-term credit 0.19 0.00 0.23 0.00 0.21 0.00 0.14 0.00

Area under fertilizerintensive crops 2.26 0.00 2.40 0.00 2.32 0.00 2.43 0.00

Prices -0.14 0.11 -0.44 0.01 -0.16 0.04 -0.09 0.36

R Square 0.96 0.96 0.96 0.96

Phosphorus Potash

DAP Super Phosphate MOP

Coeff P-value Coeff P-value Coeff P-value

Intercept -21.61 0.00 -20.71 0.00 -12.38 0.01

Short-term credit 0.28 0.00 0.30 0.00 0.37 0.00Area under fertilizer intensive

crops 3.10 0.00 2.91 0.00 2.08 0.00

Prices -0.48 0.00 -0.42 0.00 -0.49 0.00

R Square 0.93 0.92 0.95


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Table 19: Change in consumption of fertilizerdue to price change through NBS

Product(1)

Percentincreas

e inpricelevels

(2)

Estimated PriceElasticities

(3)

%increasein price *

PriceElasticity

(4)=(2)*(3)

ActualConsumption (2008-09)[000 tons]

(5)

Estimatedchange in

Consumption over

previousyear

(6)=(4)*(5)

Consumption estimatedfor coming

year[000 tons]

(7)=(5)+(6)

Urea 11.51 -0.44 -5.07 26649.21 -1349.86 25299.35

CAN 80.00 -0.16 -12.80 124.00 -15.87 108.13

AS 32.93 -0.14 -4.61 384.78 -17.74 367.04

SP -20.00 -0.42 8.40 2616.61 219.80 2836.41

DAP 7.71 -0.48 -3.70 9231.21 -341.51 8889.70

MOP 14.39 -0.49 -7.05 4077.33 -287.54 3789.79

Table 20: NPK consumption ratio


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Table 20: NPK consumption ratiobefore and after the NBS policy

ProductNutrientpercent

ProductConsumption

NutrientConsumption by

product

Total NutrientConsumption

NPKRatio

2008-09 (Actual)

Urea N-46% 26649.21 12258.637

N 14030.52 5.7CAN N-25% 124.00 31

AS N-20.6% 384.78 79.26468

DAPN-18% 9231.21 1661.6178P-46% 4246.3566

P 4665.01 1.9SP P-16% 2616.61 418.6576

MOP K-60% 4077.33 2446.398 K 2446.40 1.0

Projected for 2010-11

Urea N-46% 25299 11637.70

N 13340.49 5.9CAN N-25% 108 27.03

AS N-20.6% 367 75.61

DAP

N-18%8890

1600.15

P-46% 4089.26P 4543.09 2

SP P-16% 2836 453.82

MOP K-60% 3790 2273.87 K 2273.87 1

C l i d P li I li ti


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Conclusions and Policy Implications

World Fertilizer production, consumption and trade is

concentrated in few countries and hence the market isnot perfect.

Indian fertilizer consumption is growing faster than itscapacity to produce and hence imports.

The inputs are also imported, and hence the volatilityobserved as a result of impact of world market.

This volatility is leading to higher fluctuations in fertilizerprices resulting in heavy burden on state exchequer inthe form of fertilizer bill.

The blame that the fertilizer industrys inefficiency isbeing subsidized, is not wholly correct. In fact, in certainyears, it has been implicitly taxed.

A f th f tili b id b fi i i


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Among farmers, the fertilizer subsidy beneficiariesare, the small and marginal farmers. The trendseems to be similar in all states, except Punjab,

where, the consumption is increasing with theincrease in land holding size.

The fertilizer subsidy is cornered by a few states,namely, UP, AP, MH, MP, and Punjab, but the

disparity has come down over years.

Rice, wheat, sugarcane and cotton account forabout two-thirds of the total fertilizer subsidy, whichmay have adverse impact on land and environment.

The benefits of fertilizer subsidy have spread to un-irrigated areas, as the share of area treated withfertilizers has increased, a sign of developmenttowards equity.

Under the NBS regime the subsidy per unit of


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Under the NBS regime, the subsidy per unit ofsubsidized fertilizers will remain fixed, while theirretail prices at the farm-gate level will be decided bymarket forces.

Government has taken steps not to allow the pricesimmediately, is a welcome step.

The new policy may lead to increased imbalancedconsumption of NPK, in response to price change.

International prices of P and K fertilizers andfeedstock/raw materials are highly volatile whichmight lead to more volatility and perhaps to anincrease in farm-gate prices of these fertilizers.

If the price hikes happen, it further leads to increased

imbalance in fertilizer (N:P:K) use. But the policy may be effective in improving the use

of secondary and micro nutrients. Will invoke innovativeness among the fertilizer

companies, by additional subsidy sops and profits.


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Thank you.

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fertiliser subcidy in india