In New Delhi’s byzantine bureaucratic maze an old adage has it that whenever in doubt, set up a committee. The Union government did that recently on the subject of decontrolling prices of urea, a key fertilizer.
Urea pricing is a controversial subject. Fertilizer companies want price decontrol as in the absence of new investments the margins on the manufacture of the fertilizer are, to put it mildly, marginal. It also makes sense from an agricultural perspective: price differentials between urea and other, more complex fertilizers ensure that farmers make disproportionate use of it. This has skewed the nutrient balance of soils across the country.
The nutrient-based subsidy (NBS) scheme, announced with much fanfare in the last Budget, was supposed to rectify this problem. But unless urea is brought under the ambit of NBS, the scheme is unlikely to attain that objective.
Another aspect of the problem is that of pricing. From the government’s perspective, bringing urea under the ambit of NBS has financial implications too. It has been argued that if urea is brought under NBS with 100% import parity price (IPP), it would entail a heavy financial burden. IPP for a given month is the global average price of urea plus the freight cost for the past three months.
Seen from this perspective, the NBS announcement last year, did not factor in this problem. Of the annual fertilizer subsidy of nearly Rs50,000 crore, urea accounted for Rs21,481 crore. This was later increased by Rs5,000 crore. Thus urea alone marks close to half of the fertilizer subsidy.
If its price is decontrolled and it rises upward, there is a good chance that farmers will rationalize its use. As with most other price distorting subsidies, the subsidy on urea causes more damage than good.
At the moment part of the resistance against decontrol is political. It is felt that once prices are decontrolled, they will rise suddenly and cause a political backlash among the powerful farmers lobby that is well organized. This is a simplistic way of looking at the subject. There is no doubt that some amount of protest will take place but if the situation is explained to these farm leaders, the problem may not be a difficult one to resolve. If for no other reason but the health of India’s soils, urea prices should be decontrolled quickly.
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