A faulty fertilizer subsidy policy will worsen India’s farm distress
Summary
Price-led distortions of demand could damage the environment and also leave farmers worse off
On 19 May, a high-level committee chaired by Prime Minister Narendra Modi decided to increase the subsidy for di-ammonium phosphate (DAP) fertilizer from ₹500 to ₹1,200 per bag. This was in response to an increase in prices of complex fertilizers under the Nutrient Based Subsidy (NBS) regime in February-April 2021 that was driven by a rise in international prices of phosphoric acid and ammonia, which are used as inputs. The decision followed months of protests by farmers against rising fertilizer prices. Although it will help reduce the input costs of farmers, this immediate relief may be outweighed by the problems it would create in the long run.
The origins of the problem are traced to actions by the United Progressive Alliance government, which introduced the NBS regime in 2010 with the goal of gradually reducing India’s burgeoning fertilizer subsidies. While it decontrolled prices of complex fertilizers, it continued administering the price of urea, the most commonly used one. The immediate effect of the move was that prices of complex fertilizers rose to reflect higher input costs. What policymakers seemed to forget was that the Indian farmer is very price sensitive. As a result, not only did the consumption of complex fertilizers decline, there was also a shift in demand to urea, whose prices were still regulated. A second-round consequence was a rise in black marketing of urea and an increase in its prices. Total fertilizer consumption declined from 28.1 million tonnes in 2010-11 to 24.5 million tonnes by 2013-14. While it had recovered to 27.4 million tonnes by 2018-19, it is yet to reach pre-NBS consumption levels. What recovery did take place was also largely due to a 1-million tonne rise in consumption of nitrogenous fertilizers (mainly urea) against a matching decline in phosphatic fertilizer consumption and a 0.74-million tonne fall in consumption of potassic fertilizers.
But perhaps the biggest consequence was the worsening of the fertilizer mix. The recommended ratio of the nutrients N (nitrogen), P (phosphorous) and K (potassium) is 4:2:1. In 2010-11, it was 4.7:2.3:1. It worsened to 8.0:2.7:1 by 2013-14, before improving slightly to 6.3:2.5:1 by 2018-19. The bad fertilizer mix is harmful for the soil and environment in the long run, and a decline in soil fertility will also raise input costs.
While the disastrous consequences of NBS 2010 are still being felt, the latest decision will aggravate these problems. Fertilizer producers have hiked prices of complex fertilizers by almost half since 1 April on account of higher raw material prices. Its immediate effect has been a nearly 75% decline in the sale of DAP, prices of which rose the most. The subsidy hike has restored the prices that prevailed before the price hike. But since the subsidy is limited to DAP, it has caused distortions in the relative prices of various complex fertilizers. Those such as muriate of potash continue to witness an increase in prices introduced this February.
Given the price sensitivity of Indian farmers, these distortions will not just lower demand for fertilizers, but also encourage the adoption of an adverse fertilizer mix, in turn damaging the soil and environment. Recent data on fertilizer sales after the government’s intervention is not yet available. But past experience suggests the likelihood of an imbalance in the use of fertilizers by farmers having occurred.
It’s not just harm done to the environment by the government’s intervention in the input market and the effect it has on input costs that is worrying. But also the impact such ad-hoc decisions are likely to have on the broad profitability of farming. The wholesale price index (WPI) data released earlier this week showed a decline in farm-gate prices. Wholesale inflation in cereals was negative for the eighth consecutive month. Vegetable prices have also seen a decline on a year-on-year basis for the last six months. On the other hand, most input prices, including those of diesel, have seen a sharp increase. At a time when the economy is experiencing a sharp demand compression and a decline in crop prices in the domestic market, a rise in input prices is a sure recipe for agrarian distress.
Whatever the compulsions of such ad-hoc decisions, their consequences on agriculture and farmer incomes are likely to hurt the Indian economy. Agriculture helped absorb the shock of the covid pandemic last year and drove economic growth when all other sectors were declining. Now that the pandemic has begun to devastate India’s rural economy, the last thing farmers need is a crisis driven by flawed policy.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi
