Can Indian Farmers Reap Benefits From Government Subsidies Amid Inflation?

After interest payments, food subsidies, fertiliser subsidy will be third largest single-budget govt expenditure.

After interest payments and food subsidies, fertiliser subsidy will become the third largest single budget expenditure this year.

Image: Kamran Akhtar/ The Quint

With the Government seeking an additional appropriation of Rs 1.09 crore through the first supplementary in the current session, India’s fertiliser subsidy bill is set to exceed Rs 2.37 lakh crore this fiscal 2022-23.

After interest payments and food subsidies, fertiliser subsidy will become the third largest single budget expenditure this year, leaving behind the expenditure on constructing roads or building rail infrastructure or Capital Expenditure (CapEx) on defence.

Govt Expenditures Going Big on Fertiliser Subsidies

Excluding interest, pensions, and mandatory transfers to state governments, the revised budgetary discretionary expenditure is likely to be Rs 28 lakh crore; enhanced fertiliser subsidy will make up about 8.5% of the revised expenditure. Fertiliser subsidies cost the government only about one-fourth of this year’s expenditure (about Rs. 65-70,000 crore a year) until 2019.

This whirlwind increase in fertiliser subsidy bill is upsetting the fiscal applecart. It also raises several serious questions. Why has the fertiliser subsidy bill gone up so sharply, particularly this year? Will it remain elevated or come down? Is the government’s policy of absorbing increasing fertiliser costs in the best interest of the nation? Let's explore some of these questions.

Since 2016-17, the government budgets fertiliser subsidy fall under two different heads—first, for nitrogenous (N) fertiliser as Urea subsidy and two, for other fertiliser nutrients principally, phosphorus (P) and potash (K) as Nutrient-Based Subsidy (NBS).

The Urea subsidy regime works effectively as a normative production cost plus a guaranteed return arrangement. The government fixes up the cost per urea bag. Normative cost minus the price per bag realised constitutes the urea subsidy.

For the NBS regime, the government fixes subsidy per kg for three of the fertiliser nutrients N, P, and K and also Sulphur (S). Companies and cooperatives, including government-owned & controlled, sell these fertilisers at prices determined at the behest of the government, taking into consideration the nutrient subsidy.

Fertiliser subsidy expenditure was Rs 66,313 crores in 2016-17 with urea and NBS subsidies amounting to Rs 47,470 crores and Rs 18,843 crores respectively. In 2018-19 also, the fertiliser subsidy bill was only marginally higher at Rs 70,605 crores. Urea subsidy rose somewhat in 2019-20 to Rs 54,755 crores which raised the total fertiliser subsidy bill to Rs 81,122 crores.

Fertiliser subsidy expenditure started shooting up from 2020-21. Urea subsidy bill ominously to Rs 90,549 crore raising total fertiliser subsidy bill to Rs 1.28 lakh crore. Similar dynamics were at play in 2021-22 and fertiliser subsidy rose to Rs 1.54 lakh crore.

In the current year 2022-23, it seems the dam has burst. Budget estimates of Rs 1.28 crore already stand raised to Rs 2.37 lakh crore (including the first supplementary). This year, the fertiliser subsidy bill will increase by at least about Rs 83,553 crore, an increase of 54%— an awful increase by any standard.

Why Is Fertiliser Subsidy Spiralling?

Fertiliser subsidy bill depends on three key factors—the volume of fertiliser consumption, the actual cost of fertilisers sold and government’s policy decision regarding absorbing the extent of fertiliser cost per bag as fiscal subsidy.

India’s fertiliser consumption, in terms of the three principal nutrients (NPK), was 28.1 Million Tons (MT) in 2010-11. Annual fertiliser consumption remained below this level until 2018-19. In 2019-20, it rose marginally to 29.4 MT. However, from 2020-21, something has gone terribly wrong. Fertiliser consumption went up to 32.5 MT in 2020-21 and is estimated to have gone up a little further in 2021-22 and this year.

India uses about 35 million tons of urea fertiliser (which has 46% N) a year. Approximately 10 million is imported and 25 million tons are domestically produced. India’s urea use is about 27-30% of global production of 170-180 million tons, which is much higher than India’s share of agriculture production. On top of such high consumption, what explains the increase of about 10-15% from 2020-21 is baffling. It requires a thorough inquiry.

The primary reason for spiralling fertiliser subsidy, however, is the increase in the cost of production and import of urea. International prices of urea were about USD 250 per tonne in March 2020 and rose steadily to about 400 per tonne in March 2021.

In 2021-22, international urea prices gyrated massively: crossed USD 925 per tonne in December 2021 before coming down to about USD 625 per tonne in February 2022. After rising to its peak level of USD 1050 per tonne in April 2022, urea prices have steadily came down to USD 550 per tonne in June 2022.

Urea prices again rose to touch peak of USD 850 per tonne in September 2022 but come down to the level of USD 550 per tonne currently. The 2022-23 international urea prices have broadly averaged at 2021-22 level. If international urea prices in 2022-23 have averaged around last year, what explains large increase in urea subsidy bill?

How Has Russia-Ukraine War Impacted India’s Natural Gas Supply

The answer perhaps lies in the government’s policy decision to increase indigenous production of urea. Natural gas is the principal input for urea production. The global disruption caused in natural gas supply, thanks to the Russia-Ukraine war, it’s prices have gone up sharply and have stayed elevated. India, being a natural gas deficit country, pays heavily for gas imports. Domestic production of urea costs about 15% more than the cost of urea import. Make in India has its own costs.

The government decided not to pass even a fraction of the increase in the cost of urea to the farmers keeping the farmers’ price of a urea bag unchanged at Rs 260 for last many years. Quite understandably, this freebie contributes to shooting up government’s fertiliser subsidy bill.

The Prime Minister himself provided this rationalisation. Addressing the Kisan Samman Sammelan, he said, “Now the urea sold in the country will be of the same name, same brand and same quality and this brand is Bharat! Now urea will be available only under ‘Bharat’ brand name in the entire country”. Government has strong preference for one nation one product. The notion of ‘one country one urea brand’ flows from this basic approach.

There are many private sector companies producing urea. With all the companies now supposed to produce urea of “same quality” under the same brand, the urea producers have virtually become the contract producers of the government. Government determines the norms of cost, quality, packaging, branding and sales area. For all practical purposes, urea producing companies stand soft-nationalised.

Govt’s Fertiliser Subsidies and Push for Soft-Nationalisation

Neither extent of fertiliser subsidies nor soft-nationalisation is likely to reverse anytime soon. Natural gas prices are likely to remain elevated for at least a few years. Urea input costs are therefore, unlikely to reduce soon. No political party will increase urea prices.

As the Bharat brand gets more and more associated with the government providing fertilisers to farmers, denationalising fertiliser production is also unlikely to take place. Instead, none should be surprised, if, in times to come, the government takes over the management of some private sector urea fertiliser companies as well. Big fiscal sinkhole and all urea production in public sector is the hard reality.

(The Author is the Chief Policy Advisor, SUBHANJALI, Author: The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)