New Delhi: A Group of Ministers (GoM) is poised to pronounce an overhaul of the existing subsidy regime, which would entail additional Rs1,200 crore subsidy payouts in 2007-08, government officials, who did not wish to be identified, said.

The new nutrient-based regime, as opposed to the existing product-based programme, would focus on providing nutrient-based offsets, which would help in better targeting of the subsidies and ensure improved fertilizer mix that would contain the growing erosion in soil nutrients.

Broad consensus: Agriculture minister Sharad Pawar. The GoM, headed by Pawar, is poised to pronounce an overhaul of the existing subsidy regime.

“The GoM on fertilizers has reached a broad consensus. But the inclusion of sulphur among the subsidized nutrients and the shift to a nutrient-based subsidy regime will increase the government’s subsidy burden by Rs1,200 crore in 2007-08," said a senior fertilizer ministry official, who did not wish to be identified.

The official also confirmed that the GoM rejected a proposal to provide direct subsidies to farmers in favour of the existing system of indirect subsidy payments.

A meeting of the GoM to approve the new policy and scheduled for Friday was deferred since it overlapped with a cabinet meeting scheduled on short notice. No fresh dates have been announced.

The GoM is headed by agriculture minister Sharad Pawar and includes finance minister P. Chidambaram, minister for chemicals and fertilizers Ram Vilas Paswan and Planning Commission deputy chairman Montek Singh Ahluwalia.

Apart from including sulphur in the subsidy regime, the reforms will also introduce fortified or value-added fertilizers, the cost of which will be borne by the farmer. The process of fortification, which improves soil productivity, essentially involves enriching a regular fertilizer product with secondary or minor soil nutrients like zinc or boron. This can be done either through mixing the minor nutrients with the main fertilizer or by coating the main product with a layer of the minor nutrient.

At present, only certain fertilizer products are subsidized. Of these, only the primary nutrients—nitrogen (N), phosphorous (P) and potassium (K) —are considered for subsidy.

“For example, the 20:20:0 (N:P:K) grade of fertilizer product can be made both with or without sulphur. But since the government does not subsidize sulphur, most producers stopped using it over time. The situation is bound to improve now that sulphur will be subsidized," says R.C. Gupta, deputy director general of industry body Fertilizer Association of India (FAI).

At present, sulphur is considered the fourth most important soil nutrient after N,P and K, and its deficiency is seen as a big reason for the reduced efficacy of the primary nutrients.

Gupta also believes it is time the Indian market increasingly used fortified fertilizers. Currently, since the fortification cost is borne by the producer, very few products exist in the market. “Our understanding is that the farmer is willing to pay for the fortified product, especially because it substantially improves the fertilizer use and we can move towards more and more fertilizers customized to the soil’s requirement," said Gupta.

But the fertilizer ministry official clarified that the government will cap the degree to which a producer could fortify. “(As a result) we will effectively fix the maximum price that a producer can charge for fortification. This will prevent farmers being charged exorbitant prices on the pretext of adding value," the official added.

The GoM, the government official said, has also resolved the contentious issue of the rate at which any particular nutrient will be subsidized. In effect, the government is seeking to force producers to access the cheapest inputs.

“The idea is to find the rate of subsidy given to a nutrient when it is produced from the cheapest source. For example, urea is the cheapest source of nitrogen and, going by the current rate of subsidy, each kilogram of nitrogen costs Rs10.50 to the farmer. Hence, under the nutrient-based subsidy regime, the nitrogen content in a fertilizer product will be subsidized at this rate," explained the official.

Similarly, the benchmarks will be di-ammonium phosphate for phosphorous and muriate of potash for potash. The cheapest source for sulphur has not been ascertained as it was not part of the existing pricing model. The additional burden on the central exchequer on account of the shift to the new subsidy regime has the fertilizer industry worried, because the government has found it difficult to pay the subsidy dues on time.

The latest addition would place the total subsidy outgo for the current fiscal year at around Rs50,000 crore, more than twice the budgeted sum. Part of this, Rs7,500 crore, the government proposes to fund through the issue of fertilizer bonds.