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Fertiliser Subsidy in India: Issues for reforms

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 Fertiliser Subsidy In India: Issues For Reforms
Chittaranjan Nayak
Assistant Professor of Economics
Ravenshaw University, Cuttack, Odisha, India-753003
Email: [email protected]

Abstract
In India, the budgetary subsidy has increased enormously over time. The present paper
attempts to make an assessment of the trend, composition and reasons of increase in fertiliser
subsidy. The study observes that the fertilizer subsidies had grown at a sharper rate upto 2008 which
has declined subsequently in a relative sense. However, it is still phenomenal and a major part of
explicit subsidies in India. The paper argues for a National Policy on Targeting Subsidies. Based on
the outcome of the study, certain policy recommendations are made for fiscal discipline by
rationalizing subsidies, and target subsidies only to the financially weaker section of the economy,
which should be delivered directly to their bank accounts under Direct Benefit Scheme (DBS).
Key Words: Explicit subsidy, fiscal deficit, fertilizer subsidy, Direct benefit transfer, Import of
fertiliser, reforms
JEL Classification: E62, H23, H30, H62, H63

1.0 Introduction
Subsidy management is a keenly debated issue in India. The debate is mainly on equity versus
efficiency matters. The neo-liberal philosophy views subsidy as fiscally unsustainable and inefficient,
whereas the socialist thought argues that subsidies are essential for maintaining social equity. The
dilemma for the Government is to choose between social equity and economic efficiency. To have a
studied view, it is imperative to go for an empirical analysis on the composition of subsidies, their
growth pattern and impact on fiscal deficit. In case of India, food, fertiliser and fuel subsidies,
otherwise known as explicit subsidies, account for about 95 percent of total subsidies. A recent study
has shown that out of all the categories of explicit subsidies fertiliser subsidy is a major contributor of
fiscal deficit, albeit since the enactment of the National food Security Act, 2013 food subsidy has
increased stupendously, i.e., about 60 percent of total explicit subsidy.
India is the second biggest consumer of fertiliser in the world next only to China. Although
the country is the third largest producer of fertiliser, the total availability always falls short of demand
and is met through imports. It may be noted that India is meeting 80 per cent of its urea requirement
through indigenous production but is largely import dependent for its requirements of phosphatic and
potassic (P & K) fertilisers either as finished fertilisers or raw materials. Its entire potash requirement,
about 90 per cent of phosphatic requirement, and 20 per cent urea requirement is met through
imports. India is meeting 80 per cent of its urea requirement through indigenous production but is
largely import dependent for its requirements of phosphatic and potassic (P & K) fertilisers either as
finished fertilisers or raw materials. Its entire potash requirement, about 90 per cent of phosphatic
requirement, and 20 per cent urea requirement is met through imports. The government incurs huge
amount of subsidies, more often than not, to producers, which has significant fiscal implications. The
present paper attempts to examine the trend, pattern and reform issues pertaining to fertiliser subsidy
in India.

2.0 Literature Review

Literature on fertiliser subsidy in India basically focuses on trend, pattern, impact and reforms.
Chand and Pandey (2008) explore the composition of fertiliser subsidy and observe that a major
portion of fertiliser subsidy is granted mainly in favour of nitrogenous fertiliser, which causes
enormous price distortions and imbalances in the fertiliser consumption. The paper argues for
reducing and rationalizing fertiliser subsidy to boost fertiliser production in the country and to reduce

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consumption imbalances. Sharma (2012) attempts to examine the benefit from the current system of
fertiliser subsidies from the farmers point of view, and observes that the benefit of subsidies reaches
to all farmers. Small and marginal farmers receive about 53 per cent of the subsidy, higher than their
share in total cropped area, i.e. 44.3% (ibid). Therefore, the study argues for continuance of fertiliser
subsidy without which farming will be unprofitable in many states, and it will not be in the interest of
farming community, particularly, small and marginal farmers and less developed states/regions.
A comprehensive analysis is also done by Gulati and Banerjee (2015). The study has raised
three key issues with regard to fertiliser subsidy in India: (1) fiscal sustainability of increasing
budgetary allocation to fertiliser subsidy; (2) Price distortions leading to imbalanced use of NPK, as
also misuse of urea like diversion to neighbouring countries and its use for non-agricultural purposes;
and (3) increasing import dependence and delayed payments to industry. This paper suggests the
following alternative policy options: (a) switch to direct cash transfers to farmers on per ha basis (say
between Rs.6000- 7500/ha), allowing urea prices to be determined by demand and supply forces in
open markets; (b) take up a soil health care programme seriously, and if desirable, tag cash transfers
to this condition, and communicate that to farmers effectively; and (c) promote investments in
nitrogenous fertilisers in Gulf countries by Indian firms where gas prices are typically less than US $3
per million British thermal units (MMBTU) compared to the pooled price of $10.5 per MMBTU in
India, with some medium to long-term agreements for imports. According to the study, this will
promote efficiency in production consumption, and “provide a stable policy environment in the
fertiliser sector to ensure efficient and sustainable growth, and contributing to India's overall food-
feed-fiber security”. (ibid).
In India, fertiliser subsidy was a strategy for Green Revolution in the late 1960s. The objective
was to enhance the farm productivity by supplying farm inputs to the farmers at affordable prices.
The subsidies played an important role in promoting use of fertilisers and contributed to significant
increases in yields (Morris et al., 2007). But its contribution to agricultural growth and poverty
reduction has declined steadily over time (Fan et al., 2007). The mechanism of fertiliser subsidies has
been questioned due to its declining contribution to productivity improvement, inefficiency, inequity
and the government’s expanding fiscal deficit (Sharma, 2012). The Prime Minister's Economic
Advisory Council (PMEAC) in its Economic Outlook 2012-13 argued for “dismantling of fertiliser
subsidy because agricultural input subsidies are progressively losing their relevance, becoming an
unbearable fiscal burden and their role in contribution to productivity enhancement is fast
disappearing” (PMEAC, 2012).

Although there are several studies on fertiliser subsidy in the context of India, the focus of the
studies is on causes of increasing budgetary subsidies and their impact. There is a need to make a
comprehensive analysis of the nature and trend, pattern and economic impact of fertiliser subsidy and
reflect on the undergoing economic reforms.

3.0 Objectives
The specific objectives of the paper are
1. To examine the trend and composition of fertiliser subsidies.
2. To analyse the reasons for the growth of fertiliser subsidy,
3. To reflect on the reform agenda and suggest policy measures

3.0 Data and Methods

The data for the present paper are compiled from different sources like Department of
Fertilisers, Government of India, Fertliser Association of India, Reserve Bank of India, and Union
Budgets, Government of India. Relevant analysis is done by using simple tools like ratio analysis.

4.0 Results and Discussion

4.1 Trends in Fertiliser Subsidy
Fertiliser subsidy as a percent of GDP in India had a rising trend during 2002-03 to 2008-09.
During this period its share in all explicit subsidies, increased from 26.56 percent to 62.22 percent.

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Similarly, if we look at the share of fertiliser subsidy as a percent of GDP, it had increased from 0.48
to 1.51 percent, i.e. more than three times rise in relative standard. (refer Table 1)
In order to contain the budgetary subsidy which increased by around three times to Rs.76,603
crore in 2008-0 from Rs.26,222 crore in 2006-07, the government adopted nutrient-based subsidy
(NBS) scheme in 2010. The NBS sought to deregulate subsidy on non-urea fertilisers, and reduced
the subsidy burden someway. Fertiliser subsidy as percentage to GDP continues to decline since then.

Table 1: Trends in Central Government Subsidies in India (Rs in crore)

Fertiliser Subsidy
Fertiliser Total Explicit Fertiliser Subsidy
Year as percent of
Subsidy Subsidy(ES) as percent of ES
GDPFC
2002-03 11009 41450 26.56 0.48
2003-04 11847 43358 27.32 0.46
2004-05 15879 44581 35.62 0.54
2005-06 18460 44214 41.75 0.55
2006-07 26222 52774 49.69 0.67
2007-08 32490 66570 48.81 0.72
2008-09 76603 123123 62.22 1.51
2009-10 61264 134457 45.56 1.05
2010-11 62301 164516 37.87 0.90
2011-12 70013 211319 33.13 0.78
2012-13 65613 247854 26.47 0.65
2013-14 67339 245452 27.43 0.61
2014-15 71076 246397 28.85 0.62
2015-16 72438 241856 29.95 0.58
2016-17 70000 232705 30.08 0.51
2017-18 64974 229716 28.28 0.44
2018-19 70080 264336 26.51 0.43
Sources: 1. Annual Reports, Department of Fertilisers.
2. Expenditure Budgets of different years, Government of India

4.2 Components of Fertiliser Subsidies

A decomposition of fertiliser subsidy into subsidies on domestic and imported fertilisers gives
a better understanding of trend. It is noticeable from table 2 that subsidy on imported fertilisers was
almost nil during 2002-04. However, it started rising at a faster than the subsidy on domestic
fertiliser.

Table 2: Components of Fertiliser Subsidies over the years (Rs. in crore)

Year Indigenous Imported Subsidy to Manufacturers/

Fertilisers Fertilisers Agencies for Concessional Sale
2002-03 7499 10 3500
2003-04 8521 0 3326
2004-05 10243 494 5142
2005-06 10653 1211 6596
2006-07 12650 3274 10298
2007-08 12950 6606 12934
2008-09 17969 10079 48555

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 2009-10 17580 4603 39081
2010-11 15081 6454 40767
2011-12 20208 13716 36089
2012-13 20000 15398 30576
2013-14 26500 12045 29427
2014-15 31000 12300 24670
Source: Annual Reports, Department of Fertilisers, Government of India
4.3 Factors Responsible for Growth in Fertiliser Subsidy
The paper attempts to explore the causes from literature. As per Sharma (2012) the paper
examines the following factors responsible for growing fertiliser subsidy in India.

4.3.1 Increase in Fertiliser Consumption vis-a vis Domestic Production

Fertiliser consumption in India has increased by almost five times in India in 2013-14 as
compared to the consumption in 1980-81. Although the domestic production of chemical fertiliser has
been rising, it has been insufficient. Therefore, the volume of fertilisers imported has gone on rising
more than proportionately, year after year (Table 3).
Table 3: Production, Imports and Consumption of Fertilisers
(NPK in thousand tones)
Year Production Imports Consumption
1980-81 3006 2759 5516
1990-91 9045 2758 12546
2000-01 14752 2090 19702
2007-08 14707 7721 22570
2008-09 14334 10151 24909
2009-10 16221 9148 26486
2010-11 16380 12364 28122
2011-12 16363 13002 27790
2012-13 15735 9157 25536
2013-14 16092 7434 24482
Source: Economic Survey 2014-15 & GOI, 2013
Table 4 presents a clearer picture India’s import dependency over the years. Fertiliser
import has increased by more than three times during 2000-01 and 2013-14 from 2.09 MT to 6.73
MT (Table 4). The contribution of domestic production to the total fertiliser availability has
decreased sharply from 87.55 percent in 2000-01 to about 70 percent in 2013-14. Therefore, the
subsidy on this account has increased.

Table 4: Fertiliser Production and Import (in Nutrients)

Year Production Import Availability Production Import
(MMT) (MMT) (MMT) (% of availability) (% of availability)
2000-01 14.7 2.09 16.8 87.55 12.45
2001-02 14.63 2.4 17.03 85.91 14.09
2002-03 14.47 1.67 16.15 89.63 10.37
2003-04 14.27 2.02 16.28 87.61 12.39
2004-05 15.41 2.75 18.16 84.85 15.15
2005-06 15.58 5.25 20.83 74.78 25.22
2006-07 16.1 6.08 22.18 72.58 27.42
2007-08 14.71 7.58 22.29 65.98 34.02
2008-09 14.33 10.15 24.49 58.54 41.46
2009-10 16.22 9.15 25.37 63.94 36.06
2010-11 16.38 12.36 28.74 56.98 43.02
2011-12 16.36 13 29.36 55.72 44.28
2012-13 15.74 8.7 24.43 64.4 35.6
2013-14 16.09 6.73 22.82 70.51 29.49
Source: Annual Report 2013-14, Department of Fertilisers, GOI

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 4.3.2 Increases in the Prices of Imported Fertilisers
Another important reason for rise in the fiscal burden is the rise in prices of some major
categories of fertilisers imported along with the prices of imported raw material (feedstocks) for
fertiliser production. As far as imported urea is concerned, the free-on-board (FOB) price has
increased by 53 percent, from US $ 279 per MT in 2009-10 to US $ 422 in 2012-13 (Table 5). Import
of fertiliser raw materials such as phosphoric acid, which is the main feedback for di-ammonium
phosphate (DAP) has also become expensive phenomenally. In case of ammonia, the import price has
increased from US $ 454 in 2008-09 to US $ 633 in 2012-13. Sulphur import has also become costly
by 110 percent between 2009-10 and 2012-13. It is noticeable that the FOB price of MOP has declined
but the overall impact of rise in the import prices of major fertilizers has pushed up the subsidy bill of
the government.

Table 5: Prices of Imported Fertilisers/Fertiliser Feedstocks (US $ /MT)

Year DAP C&F US MOP FOB Urea FOB

2008-09 911.17 824.44 -

2009-10 404.26 514.69 278.64
2010-11 588.63 359.26 324
2011-12 597.9 465.95 455.5
2012-13 526.95 448.28 421.67
Source: GOI, 2013

4.3.3 Stagnancy in Gate Prices

Although the cost of domestic production has gone up due to increased prices of feedstock
fertiliser prices have been revised only thrice during 1983 and 2014-15. (Refer Table 6). The price of
urea increased by Rs 1150/MT, DAP increased by Rs 1690/MT and MOP by mere Rs 620 per MT. It
may be noted here that after the implementation of Nutrient-based Subsidy (NBS) in 2010, prices of
DAP and MOP increased steeply. But, since urea is kept out of NBS, increase in the market price of
urea is very less. The rise in urea price is just less than 3 percent annually on average basis during
2010-2014. All these result in rise in fertiliser subsidies in India.

Table 6: Price Trends of Main Fertilisers in India (Rs/ MT)

Year/ Period Urea DAP MOP
1993-94* - 6600 3800
1999-00* - 8600 3978
2010-11* - 10750 5055
2011-12* - 17749 10361
2012-13* - 26075 20636
2013-14* 5360 25184 17972
Source: Gulati et al, 2015
* Simple average of prices in each quarter

5.0 Conclusion

The paper finds that, despite rapid increase in fertiliser consumption in India, domestic
production has not increased at par. So there has been increased import of fertilisers and fertiliser
feedstocks. Furthermore, import prices of fertiliser feedstocks such as urea, phosphoric acid, ammonia
and sulphar have increased incessantly, whereas the gate prices have not been revised continuously. So,
the subsidy amount has increased manifold. The paper, therefore, suggests that in order to achieve

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 fiscal consolidation, the Government should target subsidy in a better way. Urea pricing may be
decontrolled and steps should also be taken to ensure that subsidies are given only to small land
holders. There can be an identification drive through digitalization of land records, and only the small
and marginal farmers may be listed for fertiliser subsidies, that too, the benefit should transfer directly
in the line of DBT scheme for LPG subsidy.

References

Chand, Ramesh and L. M. Pandey. (2008). Fertiliser Growth, Imbalances and Subsidies: Trends and
Implications, National Professor Project Discussion Paper 02/2008. Retrieved from:
http://sa.indiaenvironmentportal.org.in/files/fertiliser.pdf
Department of Fertilisers. (2014). Annual Report 2013-14, Government of India, New Delhi.
Government of India. (2013.) Report of the Working Group on the Fertiliser Industry for the Twelfth Plan
(2012-13 to 2016-17), Department of Fertilisers, Ministry of Chemicals and Fertilisers, New Delhi,
India.
Gulati, Ashok and Pritha Banarjee. (2015). Rationalising Fertiliser Subsidy in India: Key Issues and Policy
Options, retrieved from http://icrier.org/pdf/Working_Paper_307.pdf http://www.moneycontrol.com
Kelkar Committee Report. (2012). Report of the Committee on Roadmap for Fiscal Consolidation,
Ministry of Finance, New Delhi, India
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Sharma, Vijay Paul. (2012). Dismantling Fertiliser Subsidies in India: Some Issues and Concerns for Farm
Sector Growth, working paper No. 2012-09-01 retrieved from:
http://www.iimahd.ernet.in/assets/snippets/workingpaperpdf/14668129402012-09-01.pdf
Srivastava, D. K.; C. Bhujanga Rao; Pinaki Chakraborty and T. S. Rangamannar. (2003). Budgetary
Subsidies in India: Subsidising Social and Economic Services, National Institute of Public Finance and
Policy for Planning Commission, Government of India. Retrieved from:
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