At 0.5% of GDP, fertiliser accounts for one of the largest dole outs by government in the form of subsidies. In fact, it is second only to the food subsidy. According to the Economic Survey 2016-17, out of the total of 73,000 crores of the fertiliser subsidy only 17,500 crores or 35% reaches the small farmers.
Further, nearly 70% of the subsidy is allocated to urea, the most commonly used fertilizer. While the subsidy is meant only for agricultural use, this subsidy bias towards urea leaves scope for taking advantage and diverting or leaking the subsidies to ineligible consumers and industries. Here’s an indication of the extent of black marketing in urea in 2012-13 – while 51% of Indian farmers buy urea at above-MRP rates, in many states like Uttar Pradesh, Rajasthan farmers are buying Urea at higher MRP than the national average. The situation is worse for states like West Bengal, Karnataka, Odisha, Bihar and Assam.
Further breakdown of the black market prices prevalent in different states, indicate that Black market prices are about 61% higher than stipulated prices (i.e. MRP plus local taxes).
Small farmers seem to be bearing the brunt of this Black Urea economy. In some states like Punjab, Tamil Nadu and Uttar Pradesh black market prices, account for more than 50% additional expenditure for small farmers.
Compounding the problem of this subsidy is that it also works against reforming the domestic units producing urea. A lot of the urea subsidy goes into sustaining inefficient domestic production. The subsidy a firm receives is based on its cost of production – the greater the cost, the larger the subsidy. Thus, inefficient firms with high production costs survive and the incentive to lower costs is blunted.
So instead of working in favour of the small farmers, the fertiliser subsidy is working against them. Similarly, a subsidy that was meant to boost domestic production and control costs is failing to do so. That in a nutshell, is the messy story of fertiliser subsidy in India.
