One more fiscal problem

One more fiscal problem

At a time when there are growing doubts whether the government will be able to contain the fiscal deficit to 4.6% of the gross domestic product (GDP), it is curious that it should raise fertilizer subsidies.

Earlier this month, the government increased fertilizer subsidies to 32.33 and 26.75 per kg on phosphatic and potash, respectively, under the nutrient-based subsidy (NBS) scheme. This is the third upward revision this year. This follows an upward revision in the prices of urea, di-ammonium phosphate (DAP) and muriate of potash. It is based on these prices that government decides on the amount of subsidy doled out.

An assumption behind the 4.6% fiscal deficit number was that subsidies would contract by 12.5% (on a year-on-year basis) in fiscal 2012. Fertilizer subsidy accounts for 45% of the total subsidy bill, but the final bill depends on the amount of fertilizer sold. With these upward revisions, it seems unlikely that the deficit can be contained at 4.6% of GDP.

All this has been necessitated to ensure an adequate supply of these fertilizers that are imported—potash largely and DAP close to 50%. In 2010, India spent around $6.5 billion on fertilizer imports.

One way to contain the problem would have been to carry out a direct cash transfer of the amount in question to farmers. This has been in the works for a while now. This idea is now being given shape by a task force led by Nandan Nilekani. At the earliest, the blueprint will be ready in June and put into practice by March 2012. By that time, however, the financial year would be over and the finances of the government hit hard for sure. Even if this scheme is ready for implementation, one cannot rule out political pressures to derail it.

That would be a wrong direction to take. While it is a wider problem, unless the subsidy-investment ratio is not changed in Indian agriculture, productivity gains in the sector will remain elusive. With rising demand for food and volatility in the prices of these products becoming a near constant feature of the economy, the problem is not one of agriculture alone. It makes macroeconomic management more difficult.

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