Fertilisers are the largest component of non-labour farming costs, accounting for a third or more, on average, for both kharif and rabi crops
Neelkanth Mishra | Last Updated at January 1, 2018 22:48 IST
(This was published in the Business Standard: link)
That the Indian farmer is in distress is among the few remaining certainties in the economy. Opinions diverge widely on almost everything else, such as the outlook for interest rates, or growth. The fog discussed earlier in this column (“A fog descends on a house under renovation”, September 4) is now at its thickest, as seen, for example, in the remarkable volatility in bond yields.
The debate has now moved to what the Union government may do to meet this challenge, particularly with a spate of elections coming up. Consensus seems to be veering towards the government resorting to fiscal profligacy in the upcoming Budget, the last one before the next general elections. But no one seems to be clear on the avenues for this profligacy the government may adopt.
In my view, raising minimum support prices (MSPs), the most common expectation, does not help much. Not only are MSPs prescribed for barely a third of the country’s agricultural output (there are no MSP for vegetables, for example), even where they are, the government procurement is rarely more than a third of total production. Increasing farmers’ share of the end-consumer price, particularly for fruits and vegetables (it is already meaningful in livestock products like chicken and eggs), requires tough structural reforms at the state level. The innovative price assurance scheme that has had some success in Madhya Pradesh might require time to roll out in other states, and may not be as effective. The crop insurance scheme (itself in the process of getting overhauled) only protects against crop damage, and is not designed to provide price certainty. A last resort could be transfer of funds directly into farmer bank accounts, but this is more complicated than appears at first glance, and might be against some of the principles this government holds dear.
Improving farmer incomes thus appears difficult for now. But can the government bring down farming costs?
Fertilisers are the largest component of non-labour farming costs, accounting for a third or more, on average, for both kharif and rabi crops. It is also a sector where the government controls nearly every step of the process: From sourcing and pricing of inputs to fertiliser manufacturers, to controlling the returns made by them, to distribution and pricing of the end product. India has subsidised fertilisers since 1977 with the subsidy bill being 0.6-0.8 per cent of gross domestic product (GDP) every year for most of the last four decades. The government realises excessive control has not helped: The 2016 Economic Survey estimates that only 35 per cent of the subsidy on urea reached the intended beneficiaries. The rest was smuggled out, redirected to industrial use, or resold in the black market. Nearly half the farmers bought urea at above MRP, and the price paid was meaningfully above it. Overbearing controls and arrears on subsidies have also deterred private investment in the sector.
The sector is currently undergoing three big changes. The first is that global prices are now much lower than their peak, and combined with some pricing reform on P and K fertilisers, fertiliser subsidy this year could be the lowest as a per cent of GDP since 1983. Despite the recent surge in global fertiliser prices, subsidy accrued this year would be lower than the budgetary spend, implying that arrears to fertiliser companies should come down. The second is that Chinese exports of N and P fertilisers, which met 12-15 per cent of ex-China demand, appear to be falling as China stops “exporting blue skies” (that is, producing polluting products for exports).
It is the third change that is the most exciting, particularly as it is internal, and policy-driven. Pilots of Direct Benefits Transfer (DBT) for fertilisers have been going for a while: Fertiliser retail stores are equipped with point-of-sale devices, and against every authenticated purchase (that is, mapped to Aadhaar), the subsidy is credited to the manufacturer. Most thought (including most manufacturers, and this writer) that a systemic impact would not be felt before 2021. However, in some pilot states like Maharashtra and Rajasthan, it was expanded to all districts starting October, and by November, more than half of retailers were reporting authenticated transactions. Thus, the nation-wide rollout, while still challenging, no longer appears to be a moonshot.
Given the arrears, the initial fiscal impact of lower subsidy accruals would be limited, and the fertiliser rationing that the government desires through linkage to Soil Health Cards is likely some time away. However, half of the farmers who were unable to get urea at specified prices earlier, would see the benefits directly; and the government would also have the flexibility to provide more relief as necessary. At a broader level, this would also make the sector investible for the private sector, substituting imports, as the government limits its role to providing subsidies directly.