Dismantling Fertilizer Subsidies in India: Some Issues and Concerns for Farm Sector Growth

Abstract

While fertilizer subsidy has probably been one of the most hotly debated issues in the country over the past two decades but debate reached a new height following a recommendation by the Prime Minister's Economic Advisory Council (PMEAC) in its latest Economic Outlook 2012/13 that “subsidies are progressively losing their relevance and are becoming unbearable fiscal burden so a beginning can be made in dismantling fertilizer subsidy”. In view of this, the present paper analyses the fertilizer subsidy from two different aspects, both important for policy planners in the country. First, who is benefiting from the current system of fertilizer subsidies and secondly what is the impact of recent policy changes on fertilizer consumption and prices and proposed removal of fertilizer subsidies on farm income. Fertilizer subsidies account for a significant share of the total support to agriculture and have increased by about 560 per cent between triennium ending (TE) 2003- 04 and TE2010-11 mainly due to steep increase in international prices of fertilizers and feedstocks/raw materials, increased consumption and unchanged farm gate prices. The findings suggest that all farmers benefit from subsidies, however, small and marginal farmers receive about 53 per cent of the subsidy, higher than their share in total cropped area (44.3%). The partial decontrol of fertilizer sector which has led to unprecedented increase in prices of phosphatic (P) and potassic (K) fertilizers (about 160% in DAP and 280% in MOP) and relatively cheaper nitrogenous (N) fertilizers, led to sharp fall in consumption of P and K fertilizers, thereby imbalance in use of N, P and K nutrients. Moreover, dependence on expensive imports has significantly increased during the last 6-7 years. The results show that removal of fertilizer subsidy will make farming unprofitable in many states and therefore removal of fertilizer subsidies will not be in the interest of farming community, particularly, small and marginal farmers and less developed states/regions. The paper argues for containing subsidy but without hurting interest of millions of small and marginal farmers including tenant cultivators. As radical reforms like dismantling of subsidy and deregulation of fertilizer industry in one go are neither economically desirable nor politically feasible, a case can be made for continuation of fertilizer subsidy with better targeting and rationing to achieve socio-economic objectives of national food security, poverty alleviation and farmers’ welfare as well as subsidy reduction.