by Vivek Kaul
This is precisely what seems to have been happening in the case of urea. In the Indian case, the Indian farmers are the subsidised group of consumers (in theory) and those living in neighbouring countries which do not have access to subsidised urea are the ineligible group. This essentially ensures that urea is smuggled into neighbouring countries from India. It is estimated that nearly 41 per cent of urea is diverted into neighbouring countries and for other industrial uses as well. This is not surprising, given the huge subsidy of 75 per cent on it.769
With a huge amount of urea being diverted out of the country, farmers in states with borders with these countries find it difficult to buy urea at the government-stipulated price. Around 51 per cent of Indian farmers buy urea above the maximum retail price. In the three states bordering Bangladesh, all of the farmers have to buy urea at above the maximum retail price. Even in Odisha and Karnataka, which are nowhere near any international border, no farmer gets to buy urea at its actual price, as can be seen from Figure 12.8.
In Uttar Pradesh, which shares a border with Nepal, and in Rajasthan, which shares a border with Pakistan, the leakage rates are a very high 67 per cent and 63 per cent, respectively. The situation in this case is exactly similar to that of the foodgrains being distributed through the PDS. One estimate suggests that 46.7 per cent of the foodgrains get diverted into the black market. A similar story plays out with urea as well, given that the principle of one product-one price gets violated in both the cases.
The black market prices of urea are, on an average, around 61 per cent higher than the stipulated prices, i.e., the maximum retail price plus the local taxes on it. Given the fact that a huge amount of fertilizer makes its way into the black market, the government allows only three firms, namely, the State Trading Corporation of India (STC), the Metals and Minerals Trading Corporation of India (MMTC) and India Potash Limited (IPL), to import fertilizers into India.
India is dependent on imports in the case of phosphatic and potassic fertilizers. As far as phosphatic fertilizers are concerned, almost 90 per cent is imported. With no known commercially exploitable source of potash in India, the country is totally dependent on imports for potassic fertilizers.770
The trouble is that, if fertilizers have to be imported, the prospective demand needs to be projected. The Fertilizer Department goes about doing this every year. And, as happens in any case of central planning, things go wrong simply because it is very difficult to estimate demand from the whole market. The economist Friedrich Hayek called this the ‘knowledge problem’. He explained it in a seminal article called ‘The Use of Knowledge in Society’, which was published in the September 1945 issue of the American Economic Review.
Figure 12.8: State-wise percentage comparison of number of farmers who had to buy urea at prices above the MRP during 2012-2013.
Source: Economic Survey, 2015-2016.
As he wrote: “The economic problem of society… is a problem of the utilisation of knowledge which is not given to anyone in its totality.”771 How much fertilizer is needed is something that is known to each individual farmer and there is no way that the government can get access to this knowledge in totality.
The knowledge required to estimate demand is dispersed among many individuals, and not concentrated with a central authority like a government. As Matt Ridley writes in The Evolution of Everything: “The knowledge required to organise human society is bafflingly voluminous. It cannot be held in a single human head.”772
Given this limitation of central planning, demand projections for fertilizers often do go wrong. This leads to shortages because fresh imports take time. From the time the Fertilizer Department of the government decides to import fertilizers till the time it reaches the end consumer is 60 to 70 days. The ensuing shortage leads to prices going up in the black market. This is something that happened in 2014, when slow imports pushed up the black market prices. Furthermore, this hurts the small farmers more than it hurts large farmers because large farmers are better connected, and hence, are able to buy subsidised urea.773 Newsreports suggest that a few employees of the Fertilizer Department have also been involved in diverting urea to the black market.774
Earlier in the chapter, we saw that the sugar mills have no incentive to improve their efficiency, given that the sugarcane farmer is literally forced to keep selling to a mill in his area even if his previous dues have not been paid. A similar situation has emerged in the case of fertilizer companies as well. A company making fertilizer receives subsidies on the basis of the cost of production. Hence, the higher the cost of production, the higher the subsidy. Given this, there is no incentive for the company to lower its costs.775
What has also happened because of this is that manufacturing fertilizers is not much of a business model anymore. In order to be a viable business, the companies are totally dependent on the government. And if the government does not pay its subsidies on time, there is nothing really that they can do about it. Given this, it is not surprising that the total fertilizer production hasn’t gone anywhere over the past decade and a half.
In 2000-2001, at the turn of the century, fertilizer companies operating in India produced a total of 14.7 million tonnes of fertilizer. By 2014-2015, this had gone up to around 16.6 million tonnes, an increase at the rate of 0.9 per cent per year. Hence, not surprisingly, the total amount of fertilizer imports went up at a very rapid rate. In 2000-2001, India had imported 4.3 million tonnes of fertilizers. By 2014-2015, this had jumped up to 8.3 million tonnes, an increase at the rate of 4.8 per cent per year.776
This is another impact of Big Government in the fertilizer sector. The funny thing is that this increase in fertilizer usage is not really reflected in the increase in production of foodgrains during the same period. Foodgrain production increased from 197 million tonnes in 2000-2001 to 265 million tonnes in 2013-2014 at the rate of 2.1 per cent per year. So what explains the increase in fertilizer demand? One explanation for this may lie in the increased smuggling of fertilizers into neighbouring countries. Another explanation may be the excess usage of fertilizers.
There has to be a certain balance in the use of various fertilizers, i.e., urea, phosphatic and potassic fertilizers. Agricultural scientists essentially recommend a ratio of 4:2:1 for Nitrogen (from urea), Phosphorous and Potassium in Indian conditions.777 The ratio of NPK (Nitrogen, Phosphorus and Potassium) usage in 2013-2014 was at 9.7:2.7:1.778 This was way off the mark from the recommended 4:2:1. In 2012-2013, the NPK usage ratio had stood at a still higher 9.9:3.3:1.779
Like any other average figure, the NPK ratio hides the states where the ratio is extremely high. Take the case of Punjab. The NPK ratio there is 56.7:13.5:1. Or take the case of Haryana, where the ratio is 60.6:12.7:1. Or Rajasthan, where the ratio is 179:54.2:1. In the case of Rajasthan, the consumption of potassic fertilizers is 0.2 kg per hectare on an average, against the national average of 10.55 kg per hectare.780
The primary reason for these out-of-whack ratios lies in the fact that urea prices continue to be controlled, whereas the prices of phosphatic and potassic fertilizers have been decontrolled. Take the case of DAP, which is a phosphatic fertilizer. Between 2010-2011 and 2013-2014, the price of this fertilizer went up by 147 per cent. Or take the case of MOP (0-0-60-0), which is a particular grade of potassic fertilizer, whose price went up by 251 per cent during the same period.781
The urea price, on the other hand, has been fixed at Rs. 5,360 per tonne for many years now. There is a subsidy of close to 75 per cent on it. This explains why farmers prefer to use urea over other fertilizers, given that it is comparatively cheap. But the excess use of urea comes with its own set of repercussions. It leads to the deficiency of secondary as well as micro-nutrients, to the overall detriment of the soil.
As the Report of the Working Committee of the Fertilizer Industry for the Twelfth Plan (2012-2013 to 2016-2017) points out: “The imbalanced [sic] use of chemical fertilizers and neglect of organic manure caused many problems, like stagnation
in productivity, soil sickness, widespread deficiency of secondary and micro-nutrients, spread in salinity and alkalinity, etc. On an All-India basis, the deficiency of sulphur has been found to be 41 per cent; zinc, 48 per cent; boron, 33 per cent; iron, 12 per cent; and manganese, 5 per cent.”
This deficiency of nutrients in the soil creates other problems. Take the case of the 48 per cent deficiency of zinc in the soil. This deficiency of zinc in the soil translates into zinc deficiency in food. This ultimately leads to stunted growth and the impaired development of infants.782
Furthermore, there has been a declining response of fertilizer use on the production of foodgrains.783 This basically means that more fertilizer is now required to produce the same amount of foodgrains than was the case in the past. As the Report of the Working Committee of the Fertilizer Industry for the Twelfth Plan points out: “Imbalanced [sic] nutrition produces low yields, low fertilizer use efficiency and low farmer profit. It also results in further depletion of the most deficient nutrients in the soil. Once the critical level of a nutrient is reached, [the] yield falls dramatically.”
The excessive use of fertilizers, especially nitrogenous ones (urea is a nitrogenous fertilizer and contains 46 per cent nitrogen), has a negative effect on the environment. Part of the nitrogenous fertilizer applied is lost as gases in the form of Nitrogen (N2) and Ammonia (NH3). The nitrate (NO3) that is released contaminates groundwater resources. One of the hazardous effects of the NO3 contamination of groundwater is Methaemoglobinemia, or Blue Baby Syndrome. This leads to an abnormal amount of Methaemoglobin, a form of haemoglobin, being produced. Groundwater contamination is a huge problem in many states across India. 784
The major reason for all these problems is the overuse of urea, especially in states like Punjab, Haryana, Uttar Pradesh and Rajasthan. The overuse is pronounced in comparison to the United States, many other Asian countries, and the world in general. Nevertheless, the overuse in China is even more than that in India (not that that helps India in any way). Also, this is not something that has been observed all across India. Many states in the North East use less nitrogenous fertilizers per hectare than the global average.785
Hence, subsiding urea costs the government a lot of money in the form of leakages into neighbouring countries as well as the black market. Over and above that, it leads to the massive overuse of urea in large parts of the country, which has a negative impact on the environment as well as foodgrain yield. The excessive use also causes fertilizer shortages, which the current import machinery is not geared up to tackle. So what can be done about all these problems?
Of course, there are no easy answers to them. What may be right economically may not be right politically, and vice versa. Nonetheless, one of things that can be done is that imports can be decanalised. This would allow more importers than just the three government firms which are currently allowed and take away the exclusive right to import which currently rests with these three firms. Given this, the chances of fertilizer supply quickly responding to changes in demand are much better than is the case currently.
Another way is by ensuring that the demand for fertilizer is met by increasing domestic production. But, as mentioned earlier, given the fact that urea prices are highly subsidised and companies are dependent on timely payments from the government to make money, the chances of any private company entering the fertilizer sector continue to remain dim. Nevertheless, the government is trying to get public sector fertilizer companies to increase their production.
The government announced a new urea policy on May 25, 2015, with the aim of maximising indigenous urea production. Under this policy, the government plans to revive five defunct fertilizer factories of the Fertilizer Corporation of India and Hindustan Fertilizer Corporation. These factories would have a total production capacity of 1.27 million tonnes.786 The hope is that, with increased domestic production, the government will have to import a lesser amount of urea. This would hopefully work out to be cheaper and, finally, lead to a lower subsidy bill.
Nevertheless, as we have seen in earlier chapters, the public sector enterprises are an inefficient lot on the whole, and, for all we know, the subsidy bills of the government might just go up or continue to remain the same instead of coming down. (Remember the Hindustan Fertilizer Corporation factory that we discussed earlier in the book and how inefficient it has been?)
One solution that has been implemented in order to tackle the problems plaguing the fertilizer sector is the neem coating of urea. This essentially entails spraying neem oil on urea. In the case of the conventional urea used by farmers, the usage efficiency is 30 per cent in the case of the rice-paddy crop and 50 per cent in the case of wheat. This basically means that 50 per cent to 70 per cent of the urea is lost by volatilisation/leaching. This leads to air pollution as well as groundwater pollution.787
When urea is sprayed with neem oil, the release of nitrogen is slowed down to the extent of 10 to 15 per cent.788 This basically leads to the consumption of urea coming down by 10 to 15 per cent. In fact, research carried out by the Indian Agricultural Research Institute indicated an “increase in the rice grain yield by 6.3 per cent to 11.9 per cent with the application of neem-coated urea over normal urea”.789
Coating urea with neem oil also makes it difficult for black marketers to divert cheap subsidised urea for use in the chemical industries. In fact, urea is also used in states like Haryana and Punjab as an additive to milk in order to whiten it.790
In fact, on May 25, 2015, the government made it mandatory for all domestic producers of urea to neem coat 100 per cent of their production of subsidised urea. This was achieved as on September 1, 2015. Furthermore, 100 per cent of the imported urea had been neem coated by December 2015.791
This is expected to save the government some money, but as the Ministry of Chemicals and Fertilizers told the Lok Sabha in early August 2016: “It is too early to assess, at this stage, the details of the quantum of revenue saved from [using] Neem-Coated Urea.”792
In 2016-2017, the total fertilizer subsidy was budgeted at Rs. 70,000 crore. Of this, the urea subsidy was budgeted at Rs. 51,000 crore. But this is an understatement, given that Rs. 40,000 crore of arrears to fertilizer companies had not been paid by the beginning of the financial year 2016-2017.793 Hence, the actual fertilizer subsidy during the year should have been Rs. 1,10,000 crore. This is too huge an amount for the neem-coated urea innovation to make a substantial difference. As the economist Ashok Gulati put it in this context, “if you have an elephant and you start decorating the tail”, it is very difficult to “change the appearance of the elephant”.794
As the Fertilizer Association of India said in their 2014-2015 Annual Review of Fertilizer Production and Consumption: “The industry continued to suffer due to inadequate budget allocations, with a large amount of [the] unpaid subsidy dues [being] carried forward from one year to the next.”
It is clear by now that a major part of the problems in the fertilizer sector are because urea prices haven’t gone up in years and there is a huge 75 per cent subsidy on it. For an economist, the solution would be to raise the urea prices. If urea followed the principle of one product-one price, then there would be no way that it would get smuggled into neighbouring countries or sold in the black market for non-agricultural uses.
The trouble is that urea prices have been stagnant at Rs. 5,360 per tonne for many years now (since February 2010). Hence, the farmers are anchored into that price. The fact that urea is cheap is taken as a given. Any attempts to raise the price of urea would lead to huge protests. Even if prices are raised slowly over a period of time, the difference between the current subsidised price and the actual price of urea is way too huge not to attract any protests. Also, it is worth remembering here that subsidised urea is used more by large farmers, who also tend to be politically influential, and thus, come with a huge nuisance value. (Why do you think agricultural income continues to remain untaxed in India?)
One way to increase the p
rice of urea is to increase the MSP of rice and wheat. This could make the solution politically feasible, given that input as well as output prices are being raised. But we need to see this in the total context of the subsidies being offered by the government and not just the fertilizer subsidies. The rice and wheat that farmers sell to the government are distributed through the PDS at a central issue price of Rs. 3 per kg for rice and Rs. 2 per kg for wheat.795
Higher MSPs would mean that the government would lose more money on the rice and wheat that it buys and distributes through the PDS. Furthermore, it would also lead to farmers sowing greater amounts of rice and wheat than they currently do. As discussed earlier, the government is already sitting on much more rice and wheat than it needs. Hence, what the government could save on its fertilizer subsidy by pricing urea correctly, it would lose on the foodgrains that it distributes through the PDS (possibly more).
So just reforming the fertilizer industry in isolation would not make any sense. The National Food Security Act would also have to be reformed. And how can that be done? We will come to that later in this chapter.
****
The government subsidy system, as it has evolved, is terribly leaky. The rice and wheat distributed through the PDS do not always reach those whom they are intended for. And the same is true for subsidised kerosene. The subsidised fertilizer also finds its way to those it is not meant for. Over and above this, the poor do not get the benefits of the major part of the subsidies.
In fact, as the Economic Survey of 2014-2015 pointed out: “Price subsidies are often regressive. By regressive, we mean that a rich household benefits more from the subsidy than a poor household.” Take the case of the kerosene distributed through the PDS. 41 per cent of it is lost due to leakage and only 46 per cent of what remains is consumed by poor households. 48 per cent of the sugar distributed through the PDS is lost due to leakage, and of what remains, households in the bottom three decilesxx consume 44 per cent. In the case of subsidised domestic cooking gas, the bottom 50 per cent consume only 25 per cent.