Srihari S - 821030 - MBA207 - Assignment 6

National Institute of Food Technology Entrepreneurship and Management
MBA 207
Food and Agribusiness Environment & Policy
Assignment – 06
- Srihari S
821030
(1) Throw some light on post-liberalization developments pertaining to

fertilizer policy in India?
The decontrolling of P and K fertilizers post-liberalization had a serious impact

on the consumption of these fertilizers. The increase in prices was only partially contained
due to the provision of concessions since 1997. In 2000, the responsibility for implementing
the Concession scheme was transferred from the Department of Agriculture & Cooperation to
the Department of Fertilizers. It is noteworthy that, while most of the domestic production of
DAP was based on imported phosphoric acid, a few plants were set up in this period with
captive production of phosphoric acid.
An expert group headed by Abhijit Sen was set up in 2005 to review the cost and pricing
structure of phosphatic fertilizers. The major recommendation of the expert group was to link
the price of phosphoric acid to the international price of DAP, and use this as a reference in
negotiations of prices of phosphoric acid by the Phosphoric Acid Consumer Group.
The Nutrient Based Scheme was introduced in 2010 with the intent of improving the nutrient
balance by bringing some parity between the subsidies given for nitrogen and for other
nutrients. The NBS Scheme introduced three main changes in the system of fertilizer
subsidies.
First, the subsidy given to manufacturers was delinked from international prices
and the cost of production.
Secondly, the subsidy was specified by the national government in terms of
nutrient content per unit of nitrogen(N), phosphorus(P), potash(K) and sulphur
(S) rather than for different fertilizer products.
And thirdly, under the NBS, fertilizer manufacturers were given the freedom to set the retail
prices of the fertilizers, and the system of government regulation of
prices of fertilizers were dismantled.
Based on the recommendations of the A V Gokak committee, in December 2002, a new

scheme for urea units, called the New Pricing Scheme (NPS) was implemented by the
government. Rather than changing the system of pricing and subsidies, the focus of the NPS
was on decontrolling the distribution of urea and creating conditions for the technological
modernization of the urea manufacturing industry.
In June 2015, the Government of India notified the New Urea Policy (NUP) for existing gas-
based urea manufacturing units. The main components of the NUP were the introduction of a
uniform gas price that was a weighted average price of imported and domestic gas and a
further lowering of energy norms.
In October 2016, the government of India introduced a Direct Benefits Transfer scheme for
fertilizer subsidies on a pilot basis in seventeen districts. In March 2018, the scheme was
extended to the entire country. In the first phase, Point of Sale (PoS) machines with Aadhaar-
based biometric authentication were installed in fertilizer shops across the country and their
use was made mandatory. In July 2019, the government of India announced Phase II of the
DBT scheme. In this phase, the government intends to shift to transferring the subsidy
directly to the bank accounts of farmers and to link fertilizer sales with land records and Soil
Health Cards.
Over the last five years, three other changes have been introduced to the fertilizer
Policies. These are:
1. Allow fertilizer manufacturers to add micronutrients such as boron and zinc as well as
neem oil to up to twenty percent of their urea production.
2. Ministry of Chemicals and Fertilizers introduced a change in the size of urea bags,
replacing the fifty kg bag with a forty-five kg bag.
3. The Indian government introduced a major change in the country’s indirect taxation
system with the introduction of the Goods and Services Tax (GST).
The above are the considerable post-liberalization developments pertaining to fertilizer policy
in India.
(2) Discuss the problems that the recent policy changes have created in the
pattern of fertilizer use in India.
Based on the recommendations of the A V Gokak committee, in December 2002, a new

scheme for urea units, called the New Pricing Scheme (NPS) was implemented by the
government.
However, rather than changing the system of pricing and subsidies, the focus of the NPS was
on decontrolling the distribution of urea and creating conditions for the technological
modernization of the urea manufacturing industry. And the policy failed to attract
investments for new urea plants mainly because of a shortage in the availability of natural
gas.
Nutrient Based Subsidy (NBS) Scheme which was introduced in 2010 took the process of
decontrolling prices of fertilizers further. It was introduced with the intent of improving the
nutrient balance by bringing some parity between the subsidies given for nitrogen and for
other nutrients. Under the NBS regime, the government has progressively reduced the rate of
subsidy for P and K fertilizers. However, this subsidy is simply a top-up over and above
decontrolled prices and goes into the pockets of fertilizer companies.
This resulted in a sharp rise in the ratio of prices of non-urea to urea fertilizers. In 2018, DAP
was 4.5 times more expensive than urea and MoP was 2.5 times more expensive than urea.
SSP, which used to be the cheapest than urea until 2010 and was the main phosphatic
fertilizer used by poor farmers, was 1.4 times more expensive than urea in 2018.
In October 2016, the government of India introduced a Direct Benefit Transfer scheme for
fertilizer subsidies, In which Point of Sale (PoS) machines with Aadhaar-based biometric
authentication was installed in fertilizer shops across the country and their use was made
mandatory. Given that land records in many states are not updated or computerized, that
tenancy relations are informal, that the availability of formal sector credit is limited, and that
rural markets are informal and interlocked, any system of targeting is likely to be fraught with
errors and result in large-scale exclusion. Linking the transfer of subsidies to the mandatory
use of Aadhaar-based authentication and PoS machines may result in large-scale exclusion in
remote areas because of poor network connectivity and other technical constraints.
Neem Coating of Urea It has been reported that the availability of neem oil is only about
fifteen percent of the quantity required for coating all indigenous and imported urea. Given
the
shortage of supply and the high price of neem oil, there are also reports of mixing
of other oils, industrial chemicals, and synthetic dyes to give urea the appearance of
it having been coated with neem oil.
The imposition of a centralized GST on fertilizers added three specific problems,
Firstly, unlike varying levels of taxation in the pre-GST period, finished fertilizers have been
subject to a five percent GST since July 2017. The rates of VAT in the pre-GST period varied
across states from no taxation to up to 5.5 percent tax. In several states, for example, Punjab,
Haryana, Tamil Nadu, and Kerala, fertilizer sales for agriculture were tax-free. The
introduction of a five percent GST in these states resulted in an increase in fertilizer prices.
Secondly, while fertilizers are taxed at five percent, imported raw materials for
manufacturing fertilizers carry a higher tax (ranging from twelve to eighteen percent). This
results in manufacturers having to pay a higher tax on raw materials, and then claim a refund
of excess payment towards input tax. Delays in input tax credit refunds create problems for
domestic manufacturers.
Finally, Naphtha is taxed at eighteen percent while natural gas is taxed at five percent. This
has disadvantaged naphtha-based urea production over natural gasbased urea production.
Under the earlier system of VAT, naphtha was used for urea manufacturing was subject to
only four percent tax.

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National Institute of Food Technology Entrepreneurship and Management

(1) Throw some light on post-liberalization developments pertaining to

The decontrolling of P and K fertilizers post-liberalization had a serious impact

Based on the recommendations of the A V Gokak committee, in December 2002, a new

Based on the recommendations of the A V Gokak committee, in December 2002, a new

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