Fertilizer Policy in India: A Critical Analysis [UPSC GS 3 Notes]

In this article, one can learn more about the Fertilizer Industry in India, the various Government policies and interventions related to it, the effects these have had on the Industry, problems that are persisting, and the areas which need improvements. This article also covers the topic of neem coated urea. 

Aspirants would find this article very helpful while preparing for the IAS Exam.

Table of Contents:

Fertilizer is defined as any organic or inorganic substance, natural or artificial supplying one or more of the chemical elements/nutrients required for plant growth. They provide six macronutrients and eight micronutrients to the plants for well-balanced growth.

Nutrients

Primary (Macro) Nutrients

Nitrogen (N), Phosphorus (P), and Potassium (K), Calcium (Ca), Magnesium (Mg), Sulphur (S)

Secondary (Micro) Nutrients

Boron (B), Chlorine (Cl), Copper (Cu), Iron (Fe), Zinc (Zn), etc

Types

1. Nitrogenous: Essential Component Is Nitrogen (N). Ex Urea, Ammonium Nitrate, Ammonium Sulphate
2. Potassic: Ex Potassium Nitrate, Chile Saltpetre
3. Phosphatic: Ex-Super Phosphate, Triple Phosphate

Spraying urea with neem oil. It has a few benefits (Agronomic and Environmental benefits).

1. Neem has proven nitrification inhibition properties. This way it slows down the process of nitrogen release from urea (by about 10 to 15 percent). Nitrogen Use Efficiency (NUE) of Neem Coated Urea increases resulting in reduced consumption of NCU as compared to normal urea. Thus it reduces the consumption of the fertilizer
2. Enhance the yield of paddy, sugarcane, maize, soybean, Tur/Red Gram
3. Decrease the urea requirement. Hence, save Money.
4. Improvement in soil health
5. Reduction in usage of plant protection chemicals
6. Reduction in pest and disease attack
7. Negligible diversion towards non-agricultural purposes.

Indian soils are generally deficient in nitrogen, phosphorus, and potassium and do not give high yields. Hence, the need for fertilizers. Green Revolution (Use of chemical fertilizers was one component) has made a significant impact on Indian agriculture. Thus, India was able to achieve self-sufficiency in food production.

1. Fertilizer Manufacturing Companies (PSUs): National Fertilizers Limited, Rashtriya Chemicals & Fertilizers Limited, etc
2. Fertilizer Manufacturing Co-operatives: IFFCO, KRIBHCO, etc
3. Position in the World: 3^rd in terms of production and 2^nd in terms of consumption
4. Decision-Making Body: Department of Fertilizers, Ministry of Chemicals & Fertilizers, Govt of India

Union List (Entry 52) & Concurrent List (Entry 33)

Fertilizer as an industry is under the control of the Union Government (being in the First Schedule of the IDR (Industries (Development and Regulation)) Act, 1951 vide Entry 52 of List I and also Entry 33 of List III. Urea dominates the sector. It is the most produced (86%), the most consumed (74%), and the most imported (52%). India produces about 80 percent of its Urea fertilizer needs. And the fertilizer industry has the capacity to indigenously meet 50 percent of the country’s phosphatic fertilizers. But India still depends heavily on imports for the raw ingredients for its phosphatic and potassium fertilizers.

1. Objectives: Major focus of the fertilizer policy has been on primary (macro) nutrients.
2. Since independence, the Government of India (GoI) has been regulating the sale, price, and quality of fertilizers. GoI has declared fertilizers as an essential commodity. GoI issued the Fertilizer Control Order (FCO) under the Essential Commodities Act, 1957.No subsidy was paid on Fertilizers till 1977 except Potash for which subsidy was paid only for a year in 1977.
3. Retention Pricing Scheme (RPS): Introduced for nitrogenous fertilizers in 1977. Later, it was extended to phosphatic and potassic fertilizers (Including Imported fertilizers). In this, the difference between retention price (cost of production as assessed by the government plus 12% post-tax return on net worth) and the statutorily notified sale price was paid as a subsidy to each manufacturing unit. This was the beginning of the “Product-based subsidy” regime.

Effect

1. It resulted in an extraordinary increase in domestic capacity/production and the consumption of fertilizers. An increase in fertilizer use led to a significant increase in the productivity of cereals and thereby overall foodgrains production.
2. In the 90s, there was a huge subsidy burden on the government. This led to an increase in Fiscal Deficit.
3. In 1991, a Joint Parliamentary Committee (JPC) was appointed to review the Fertilizer Pricing. The Committee did not favour total decontrolling of fertilizers but recommended decontrol of import based phosphatic and Potassic fertilizers

Based on the recommendations, the GoI decontrolled all Phosphatic and Potassic (P&K) fertilizers namely DAP, MOP, NPK complex fertilizers, and SSP (Single Super Phosphate)in 1992 which were under Retention Price Scheme (RPS) since 1977. But, Urea which continued to remain under RPS.  

Effect

1. The prices of phosphatic fertilizers became high. Hence, the production and consumption of nitrogenous fertilizers increased and consumption of P&K fertilizers decreased. This led to a severe imbalance in the consumption of nitrogenous, phosphatic, and Potassic fertilizers.
2. Ad-hoc Concession Scheme: For phosphatic, potassic, and NPK complex fertilizers. It was to provide P&K fertilizers to the farmers at affordable prices to increase food productivity in the country through the balanced use of fertilizers. Under this scheme, the concession was disbursed to the manufacturers/importers by the State Governments based on the grants provided by the Department of Agriculture & Cooperation (DAC).
3. During 1997- 98, the Department of Agriculture & Cooperation (DAC) started indicating an all India uniform Maximum Retail Price (MRP) for DAP/NPK/MOP. The total delivered cost of fertilizers being invariably higher than the MRP indicated by the Government, the difference in the delivered price of fertilizers at the farm gate, and the MRP was compensated by the Government as a subsidy to the manufacturers/importers.
4. Till 2000, the issues relating to fertilizer subsidy were being looked after by DAC, and thereafter it was continued by the Department of Fertilizers.
5. In the year 2000, The Expenditure Reforms Commission (ERC) recommended for the dismantling of existing RPS for urea. Hence, RPS for urea units was replaced byNew Pricing Scheme (NPS) in the year 2003.

Concession Scheme for urea units based on the prices of feedstock used and the vintage of plants. It had various phases like NPS-I (2003-2004), NPS-II (2004-2006), and NPS-III (2006 onwards). The difference between the cost of production and the selling price/MRP is paid as a subsidy/concession to manufacturers. Urea is the only controlled fertilizer, which is sold at the statutory notified uniform sale price. The Phosphatic and Potassic fertilizes are decontrolled and are sold at indicative maximum retail prices (MRPs).

Aim

Helping the urea units to achieve internationally competitive levels of efficiency, greater transparency, and simplification in subsidy administration.

Effect

1. It resulted in the distortion of the market. The fertilizer companies started bleeding due to fixed Urea prices and the rising cost of Inputs such as Natural Gas and Naptha as 80% of the production of urea in India is gas-based.
2. Imbalance in the use of fertilizers. Also, led to the misuse of it through illegal export, preparation of adulterated milk, etc.

1. The subsidy outgo of Government increased exponentially by 500% during 2005-06 to 2009-10 under the Concession Scheme with about 94% of the increase caused by an increase in international prices of fertilizers and fertilizer inputs, and only 6% attributable to increase in consumption.
2. The product-based subsidy regime proved to be a losing proposition for all the stakeholders viz farmers, industry, and the Government. Hence, keeping in view the agriculture productivity, balanced fertilization and growth of the indigenous fertilizer industry, competitiveness amongst the fertilizer companies and to overcome the deficiency of concession scheme, the Government introduced Nutrient Based Subsidy (NBS) Policy for P&K fertilizers (MOP, DAP, etc) with effect from 2010

1. The government fixes subsidy on an annual basis based on the weight of the different macro/micronutrient (N, P, K, S, etc) contained in the fertilizer
2. Manufacturers/Marketers are allowed to fix the Maximum Retail Price (MRP) at a reasonable level

Aim

It aims at ensuring the balanced use of fertilizers, improving agricultural productivity, promoting the growth of the indigenous fertilizers industry and also reducing the burden of Subsidies.

Drawbacks

1. Urea is not covered under the scheme
2. Delay in NBS subsidy payments. Hence, Fertilizer companies focus more on Urea than other fertilizers
3. Increase in prices of Phosphoric and Potassic fertilizers
4. Farmers overuse Urea. Hence, the ideal ratio of NPK is disrupted

Aspirants can know in detail about the Nutrient Based Subsidy Fertilizer Policy on the link provided here.

The government has made it mandatory for domestic fertilizer firms to “Neem coat” at least 75 percent of their urea production (It can even go up to 100%). Earlier, there was a cap of 35% on this. The government has also allowed manufacturers to charge a small 5 percent premium on Neem-coated urea

Aim

Checking the excessive use of urea which is deteriorating the soil health and adversely impacting overall crop yield. Maximizing indigenous urea production and promoting energy efficiency in the urea units.

Benefits

1. Reduce the subsidy outgo thus rationalizing the subsidy burden on the Government of India.
2. Prevent diversion of urea for industrial use

Limitations

1. The subsidy savings arising out of this pales beside the enormity (financially and politically) of the fertilizer subsidy that is paid on the three major fertilizers, N, P, and K.

Gas Pooling Policy, 2015

All urea units would get gas at a uniform price. It seeks to change the industry dynamics in the Urea sector by leveling gas costs for all players.

Policy on Promotion of City Compost

• The Government of India approved a policy on promotion of City Compost, notified by the DoF in 2016 granting Market Development Assistance of Rs. 1500/- for scaling up production and consumption of city compost.
• To increase sale volumes, compost manufacturers willing to market city compost were allowed to sell city compost in bulk directly to farmers.
• Fertilizer companies marketing city compost covered under the Direct Benefit Transfer (DBT) for Fertilizers.

New Urea Policy, 2015

To incentivize domestic manufacturers and free transportation of P (phosphorus) and K (potassium) fertilizers. It will be in force from 2015 to 2019 (4 Financial years)

Need for the Policy

1. India is the world’s third-largest consumer of fertilizers
2. India is highly import-dependent in the case of urea. Presently, India is importing about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes

Objectives

1. Maximize indigenous Urea Production to reduce import dependency and reduce the subsidy burden on the government
2. Promote energy efficiency to reduce Carbon-footprint (via energy efficiency) to make Urea production environment friendly. [This will be done via revised specific energy consumption norms]
3. Make Urea production plant to adopt the best technology available and become globally competitive
4. Rationalization of Subsidy burden
5. Timely supply of Urea to farmers at the same MRP

Salient Features

1. The government will cover the entire cost of natural gas, which is the main feedstock of urea.
2. Movement plan for P&K fertilizers has also been freed to reduce the monopoly of few companies in a particular area so that any company can sell any P&K fertilizer in any part of the country. Rail freight subsidy has been decided to be given on a lump sum basis so that the companies economize on transport. This will help farmers and reduce pressure on the railway network

Proposed Outcome

1. Will cut the yearly subsidy bill
2. Increase annual production by 2 million tonnes

Drawbacks

1. Does not seek to reduce the subsidy on N, P, K fertilizers
2. Gas availability is a key concern

Issues that need Attention

1. Fertilizer is second highest in terms of subsidy (0.73 lakh crore or 0.5 %of GDP) after food. This has led to a high Fiscal Deficit. Also, only 35% of the total fertilizer subsidies reach small farmers. The rest leaks out to the black market, large farmers, and inefficient producers
2. Administered Price of Urea – Approx Rs 5000/Tonne
3. Average Production Cost of Urea – Approx 18000/Tonne This means the Government subsidizes 70% of the cost. Note: The government subsidizes 30% of the cost on P (Phosphorous) and K (Potassium) fertilizers. Prices of P and K were partially decontrolled under the nutrient-based subsidy scheme in 2010.

Use of Space Technology in Fertilizer Sector

• DoF commissioned a three year Pilot Study on “Resource Mapping of Rock Phosphate using Reflectance Spectroscopy and Earth Observations Data” by National Remote Sensing Centre under ISRO, in collaboration with Geological Survey of India(GSI) and the Atomic Mineral Directorate (AMD).
• Preliminary Data processing for the phosphate mapping is completed. Spectral analysis of samples collected during field work is completed.

Aspirants of the upcoming UPSC exam can go through the following links to prepare comprehensively –

(FAI) points out “Budget allocations get exhausted in the first five months of the financial year due to gross under-budgeting for the fertilizer subsidy in the successive Union Budgets. The year ends with carrying forward of the huge amount of unpaid subsidy bills which has been of the order of Rs 30-40,000 crores for the past three years.”

1. There is a wide price differential between urea and P and K fertilizer. For Example, Di-ammonium Phosphate (DAP) retails at about Rs 24,000 a tonne (Costly). This has discouraged the use of P and K fertilizer, resulting in a serious nutrient imbalance in the soil

  According to FAI, the N:P:K ratio was 8.2:3.2:1 in 2011-2012 against an ideal 4:2:1

1. Fertilizer prices follow the trend in international petroleum prices. The International market is volatile
2. Most of the Fertilizer manufacturing cooperatives are loss-making due to the high-interest burden
3. On one hand, taxpayers pay for subsidies (and MSP), yet consumers still suffer from food inflation due to low production.
4. There is a decline in investment in new urea plants so that the government is forced to import to make up the shortfall, which is about a quarter of its total urea requirement
5. Farmers don’t move to fruits, vegetable, horticulture cropping because they require special non-Urea fertilizers, which are not easily available at cheap rates
6. The shortage of coal and natural gas (feedstock) has decreased Urea production. The government has to import from abroad. This has increased the government’s subsidy bill. Recently, 3 urea plants were granted the permission to run on Naptha because the government was not able to provide them a Gas pipeline

“If you have an elephant and you start decorating the tail, you are not going to change the appearance of the elephant”. The “elephant” in this case is the fertilizer subsidy the government is finding increasingly difficult to sustain. The root of the problem lies in the administered pricing policy and the government’s increasing inability to afford the subsidy. Political compulsions (Due to drought) also make this an inopportune time to raise prices.

Suggested Measures

1. Rationalization of fertilizer subsidies
2. Decanalising urea imports
3. This would increase the number of importers and allow greater freedom in import decisions. It would allow fertilizer supply to respond flexibly and quickly to changes in demand
4. Reduce the dependence on imports and increase domestic production
5. A policy framework that incentivizes domestic production of fertilizers
6. Change the pattern of fertilizer use. This can be done by revamping and re-energizing the extension services and also changing the NBS suitably to remove the price distortion caused by it
7. NBS should be extended to Urea also

At Present, central and state governments offer a host of price subsidies, including on rice, wheat, pulses, sugar, kerosene, cooking gas, water, electricity, and fertilizer. Price subsidies have formed an important part of anti-poverty policies in India, but have not transformed the lives of the poor.

Why Rationalization?

1. The fiscal cost of the price subsidies amounts to 4.24% of gross domestic product (GDP)
2. Price subsidies are regressive, meaning richer households benefit more than poorer households
3. The subsidies benefit manufacturers the most, not poor farmers
4. The Economic Survey stressed on cutting back of price subsidies by using technology as a means to plug leakages

Aim

1. To cut leakages in the subsidies and not cut the subsidies itself
2. Converting all subsidies into direct benefit transfers

Pitch for Rationalization

1. Expenditure Reforms Commission (ERC) examined this issue in 2000 and made a strong statement for rationalization

Has the Rationalization of Subsidy been Successful before?

1. Direct Benefits Transfer (DBT)has been successful in the case of LPG

How can it be done?

Correcting Price Signals and Decontrolling the Fertilizer

Among the large developing economics, perhaps Indian farmers pay the lowest price for urea. This leads to the misuse of urea (Its diversion to non-agricultural uses as well as its being smuggled into neighbouring countries).

Direct Cash Transfer to the Farmers

Instead of subsidizing fertilizer (especially urea) plants and keeping the price of urea abnormally lower than market dictated prices, the government can simply transfer cash to farmers equivalent to the current fertilizer subsidy. It can be done through the JAM platform. It will help the state to offer subsidy support to poor households in a targeted and less distortive way. It can use using mobile money and post offices to transfer subsidies. This will lead to huge savings by simply stopping the diversion of urea for non-agricultural uses and to other countries

Tie-up with Gulf Countries to Set up Plants

Pooled gas price for urea plants in India is more than three times higher than in Gulf countries. So the best way is setting up joint ventures in countries where gas price is relatively low. For Example, the Fertilizer Ministry’s joint venture in Oman, which allowed India to import fertilizer at prices almost 50 percent cheaper

Increase in Soil Testing Facility and Issuing Soil Health Cards

The focus should be on testing the soil testing facility and issuing soil health cards after testing the soil.

Digitization of Land Records

Without setting right the land records, it will be impossible to transfer the subsidy to beneficiaries or to issue soil health cards.

Positives

1. It will ensure financial benefits for all the stakeholders involved like the government of India, farmers, fertilizer manufacturers, and the public at large
2. It is the best tonic for the ailing fertilizer industry

Without a developed fertilizer industry, schemes like Soil Health Cards, Second Green Revolution, etc. will remain only paper schemes.

• Primary (Macro) nutrients
• Secondary (Micro) Nutrients
• Urea
• Neem Coated Urea
• Green Revolution
• IFFCO
• KRIBHCO
• Union List
• Concurrent List
• Fertilizer Control Order
• Essential Commodities Act, 1957
• Product-based subsidy
• Maximum Retail Price
• Expenditure Reforms Commission
• Nutrient Based Subsidy
• Gas Pooling Policy
• New Urea Policy
• Fiscal Deficit
• N:P:K ratio
• Fertilizer manufacturing co-operatives
• Administered pricing policy
• Rationalization of fertilizer subsidies

General Studies 2:

a. Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

General Studies 3:

1. Agriculture & related issues; Subsidies

Practice Question – For Mains

1)Is India’s fertilizer policy is flawed? Critically Evaluate.

2)What do you mean by the rationalization of subsidies? How do you think it can be achieved in the fertilizer sector?

Aspirants can get previous years’ Agriculture questions for UPSC Mains GS 3 for practice.

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