Fertilizer Subsidies

Context: Sales of Urea crossed a record of 37.5 million tonnes in the last fiscal year (2022-23). Increasing consumption of Urea will not only increase the subsidy burden over the government but also have environmental consequences.

How fertilizers are 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, Government of India has been providing subsidized fertilizers to the farmers since 1970’s. Over the period Govt has devised separate mechanisms for Urea(N) Subsidy and Non urea (P, K) fertilizer subsidy. 

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.
    • Since 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 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 govt. NBS, so decided, would be converted into 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 DBT model in fertilizers is different from the conventional system of DBT being implemented in LPG. 
  • Under this, farmer would continue to get fertilizer at subsidised price where as 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:

  • 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/.
  • 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 subsidy than small and marginal farmers
  • Increased subsidy burden on the government. Fertilizer subsidy is one of the important items of revenue expenditure
  • Fertilizers subsides are treated as Amber box subsidies and breaching the WTO (AoA) limit of 10%.

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.  
  • Unlike the coarse particles that farmers normally throw onto the soil during sowing, the nano particle form of 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:
    • Maximizing indigenous urea production
    • Promoting energy efficiency in urea production
    • Rationalizing subsidy burden on the government
  • Encouraged Organic farming through “Paramparagat Krishi Vikas Yojana”

Way forward:

  • Deregulating the MRP of Urea and a pay 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 government would be transferring the cash amount in the farmers account. This will help in rationalising the subsidy burden on the govt.
  • 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 reduces the price.
  • Encourage Bio fertilizers and Fertigation techniques to reduce chemical fertilizers consumption.

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