Raising the price of fertilizers is probably one of the more difficult decisions that a government can take in India. A strong and vocal farmers’ lobby and serious political backing for this ruinous attachment have ensured its continuity for long.
Yet, last week a group of ministers (GoM) led by Pranab Mukherjee took the surprising step of agreeing with a committee of secretaries: It agreed to a modified pricing policy for urea. This step, if approved by the cabinet, will clear the way for raising the retail price of urea by 10%. It will mark a small, but important, first step in the right direction.
The relative price of nitrogenous fertilizers (urea being one) and phosphatic fertilizers has little relation with what is required for healthy soil. This distorts their use by farmers. But that is not all: much of the raw material for fertilizer production—natural gas to cite one example—is imported. Subsidizing output is clearly a bad idea. In that sense, what the ministers have done is positive.
But that is about all that they’ve done. As reported in Mint on Saturday, price increases will still be partial—while full decontrol of urea is what is clearly needed by both farmers (even if they are dead set against this) and manufacturers. Yet, what the GoM has done is allow only a 10% increase in price—a throwback to the administered price mechanism raj, this time agreed to by ministers and not bureaucrats.
Then, there are other restrictions too: pricing freedom has been restricted to urea manufacturing units that use natural gas as a feedstock and not those using naphtha. This is something that perpetuates the distortions in the structure of the fertilizer industry. It is another effort at protecting those units that are clearly not viable. The best course would be to simply open the sector for competition between existing units and letting unviable ones close down. But for some strange reason, the government wants to continue subsidizing laggard units. It should not—for, unlike farmers, manufacturing plants have no votes.
What the cabinet should do is grant pricing freedom to fertilizer companies. Pressure from coalition partners is less likely at the moment—the Dravida Munnetra Kazhagam, an opponent of decontrol—is in no position to resist it. It also makes very good fiscal sense. This is the right time for a bold step.
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