Fertilizer Subsidies: Mechanism and Challenges

Context: The 10th World Soil Day was recently celebrated on December 5, 2024. The theme ‘Caring for Soils – Measure, Monitor, and Manage’ was appropriate as our soils are becoming deficient in the essential nutrients needed for healthy soils. The role of the fertilizer industry is critical in ensuring that our soils are healthy and well-nourished.

State of Soil in India: 

• Topsoil (up to two to three cm in depth), which takes 1,000 years to form, is a critical resource for Agriculture as almost 95% of food currently produced comes from it. 
• The major essential nutrients in a productive soil include nitrogen (N), phosphate (P) and potash (K).
  • Less than 5% of Indian soils have high or sufficient nitrogen.
  • Only 40% have sufficient phosphate.
  • Only 32% have sufficient potash.
  • Only 20% are sufficient in organic carbon. 
• Our soils suffer from a deficiency of micronutrients like sulphur, iron, zinc, boron, etc. 

How are fertilizers subsidised in India?

• Fertilizers provide key nutrients (N, P and K) to the soil. Important fertilizers are- Urea (N based), DAP (P based) and MOP (K based). 
• With the objective of enhanced agricultural growth, the Government of India has been providing subsidized fertilizers to the farmers since 1970's. Over the period the Government has devised separate mechanisms for Urea(N) Subsidy and Non urea (P, K) fertilizer subsidy.
• The allocation for fertilizer subsidy for FY24 was budgeted at Rs 1.75 lakh crore in FY24.

Subsidy Mechanism for Urea:

• Cost-Plus Method: Under this method, the MRP of Urea is statutorily fixed by the Government of India and the difference between MRP and Cost of production is provided to the manufacturing company as subsidy. Different amounts are given to different manufacturers based on their Cost of production.
  • As this method encourages the fertilizer companies to remain inefficient, New Urea Policy (2015) addressed this anomaly.
  • Under New Urea Policy (2015) all the gas-based urea manufacturing plants are divided into three groups and a specific energy norm is fixed for each group. Urea plants falling in the same group will be getting the same amount of subsidy irrespective of their actual cost of production (actual consumption of energy). This will force plants to become more energy efficient.

Subsidy-mechanism for Non-Urea (P, K) Fertilizers:

• Nutrient-Based Subsidy (NBS): The market prices of these fertilizers are deregulated. Manufacturers are free to decide the market price at which they want to sell and they receive a fixed subsidy from the government based on the amount of nutrient (N, P & K) present in a given amount of fertilizer. 
• NBS to be paid on each nutrient namely ‘N’, ‘P’, ‘K’ & ‘Sulphur’(S) would be decided (per kg) annually by the government. NBS, so decided, would be converted into a subsidy per tonne for each subsidized fertilizer.
• Under NBS Policy, freight cost is also reimbursed to the fertilizer companies on account of movement of P&K fertilizers.

DBT in Fertilizers:

• The Direct Benefit Transfer (DBT) model in fertilizers is different from the conventional system of DBT being implemented in LPG.
• Under this, farmers would continue to get fertilizer at subsidised price whereas the fertilizer companies receive subsidy, only after the fertilizers are sold to farmers by the retailers through Point of Sale (PoS) machines (linked to the Department of Fertilizers’ e-Urvarak DBT portal) through biometric authentication by Aadhar Card.

Issues of Fertilizer Subsidies:

• Loss of Fertility: Since the price of Urea is still regulated, it failed to achieve balanced use of fertilizers and resulted in loss of fertility of soil and pollution of water bodies.
• Diversion of subsidised fertilisers: Illegal diversion of Subsidised fertilizers for other Industrial uses like manufacturing of plywood, textile dyes etc.
• Fertilizer subsidies are regressive: Since rich farmers use more fertilizers, they end up getting more subsidies than small and marginal farmers.
• Increased subsidy burden on the government: Fertilizer subsidy is one of the important items of revenue expenditure. 
• Breaches WTO AoA limit: Fertilizer subsidies are treated as Amber box subsidies and breach the WTO (Agreement on Agriculture) limit of 10%.
• Inverted Duty Structure:  The Basic Custom Duty (BCD) and GST rates of finished fertilizers are more than the raw materials like Sulphuric Acid and Ammonia and Natural gas, a major input for fertilizers, remains outside GST.

What are the steps taken by the Government till now?

• Reduced the size of the Urea bag from 50 kg to 45 kg to prevent indiscriminate use. 
• Soil Health Card Scheme promoted balanced use of N, P and K fertilizers (ideal ratio is 4:2:1)
• Neem-coated Urea not only prevented the illegal diversion of urea for Industrial use but also improved nitrogen-use efficiency by slowing the release of nitrogen and thereby reducing the consumption.
• Introduction of Nano Urea:
  • Nano Urea contains nitrogen in the form of granules that are a hundred thousand times finer than a sheet of paper. At this ‘nano’ scale, which is about a billionth of a metre, materials behave differently than in the visible realm. 
  • Nano Urea when applied on to the leaves, stimulates a range of enzymes, like nitrase and nitrite reductase, which helps plants metabolise nitrogen.
• New Urea Policy (2015):
  • Maximising indigenous urea production.
  • Promoting energy efficiency in urea production.
  • Rationalising subsidy burden on the government.
  • Encouraged Organic farming through “Paramparagat Krishi Vikas Yojana.”
• One Nation One Fertilizer (ONOF): Under this scheme, all types of fertilizers, whether it is DAP, NPK or urea will be sold under the brand name of ‘Bharat’. This will standardise fertilizer brands across the nation irrespective of the company that manufactures it.
• PM Program for restoration, awareness, nourishment & amelioration of mother earth (PM-PRANAM) is aimed at incentivising the states to promote balanced use of fertilizers by reducing chemical based fertilizers. 

Way Forward:

• Deregulating the MRP of Urea and paying a fixed per-tonne subsidy linked to its nutrient content of 46% Nitrogen.
• Introduce Direct cash transfer method of subsidy (on the lines of LPG subsidy) where farmers can purchase the fertilizers at the market price and the government would be transferring the cash amount in the farmers account. This will help in rationalising the subsidy burden on the government.
• Triangulating data on fertiliser sales, soil health cards (SHC), PM-KISAN, land records, crops grown, bank accounts and mobile numbers of farmers should be undertaken for seamless implementation of DBT mechanism in fertiliser subsidy.
• De-Canalization of Urea imports: At present Urea is imported only by government agencies. Allowing private agencies to import the urea will increase competition and reduce the price.
• Encourage Bio fertilizers and Fertigation techniques to reduce chemical fertilizers consumption.
• Reduce GST rate and customs duty for raw materials such as Sulphuric Acid and Ammonia for P&K fertilizers to at least 5%.           
• Bringing Natural Gas under the ambit of GST.
• Need to create separate tariff code for Urea being used for non-agricultural purposes.