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Why PM Modi must not give up on fertiliser DBT

Uttam Gupta
The manufacturers of non-urea fertilisers are given 'uniform' subsidy (on per nutrient basis) under the nutrient based scheme (NBS).

According to a survey by NITI Aayog, nearly two-thirds of the farmers don't favour direct benefit transfer (DBT) of fertiliser subsidy. If this is also the thinking of our policymakers, then it would leave one shell shocked as it would be tantamount to a complete reversal of the process set in motion a couple of years ago.

In FY17, the government launched pilot projects for linking subsidy payments to producers, for the sale of fertilisers to farmers by retailers in 18 districts spread over 12 states. It was launched across the country in April 2018. Under the scheme, manufacturers receive 100% of subsidy after fertiliser is delivered to the farmer, and the latter's identity viz. Aadhaar is captured on the point of sale (PoS) machine at the dealer's shop. Termed direct benefit transfer (DBT), the nomenclature is misleading as the subsidy continues to be routed through manufacturers.

The manufacturers sell urea at the maximum retail price (MRP) controlled by the Centre, which is kept at a low level. They also get subsidy reimbursement on unit-specific basis under the new pricing scheme (NPS). The manufacturers of non-urea fertilisers are given 'uniform' subsidy (on per nutrient basis) under the nutrient based scheme (NBS).

Early last year, Niti Aayog and ministry of finance (MoF) were working on a road map for giving subsidy directly to farmers. The plan was to implement it within 3-4 months after the new government took charge. This has not happened so far. Now, if abandoning of the scheme is being considereed by the official think-tank, there is a need for deep introspection. Is it because farmers don't want it or is there more to it?

To get to the root, let us consider this. At present, the farmer pays Rs 268 for a bag of urea-a bag contains 50 kg-as against the cost of supply that is at least twice as much , or Rs 536 (it could be even higher depending on the manufacturer who supplies the material). The difference is claimed by the manufacturer as subsidy from the government. Under this arrangement, subsidy to farmer is embedded in the price-also termed as subsidised price.

Under DBT, the farmer will have to pay the higher cost-based price or Rs 536 to the manufacturer, and get subsidy of Rs 268 'directly' in the bank account.

Effectively, he will continue to shell out Rs 268-as is the position under the existing dispensation. Yet, the switch-over makes a big difference as he has to first pay the full price, and thereafter, get the subsidy. And, there lies the rub.

The very rationale for giving subsidy is that majority of the farmers are poor and cannot afford to pay a higher price. Yet, if a farmer has to pay a higher price, where will the extra money come from? Who will plug the gap at the time of purchase? Will banks provide the funds? Who will bear the interest cost?

Even if the government directs banks to give loans and agrees to fully reimburse the interest cost, farmers will still have to go through a nightmare. Many may not even get the funding, forcing them to fall back on the money lender-the surest invitation to a debt-trap. But, this can be avoided if only the subsidy is transferred to farmers' account as an advance. The government can conduct post-facto checks to detect misuse and take appropriate legal action and deny the benefit of subsidy in the future.

During the initial years of the existing scheme, the bulk of the subsidy amount was released to manufacturers on 'dispatch' of the material from the factory.

Even prior to April 2018, the government was releasing 95% of the subsidy to urea manufacturing units and 85% to complex manufacturers linked to 'sale of material in the district' (balance 5%/15% for urea/complexes was paid on confirmation of sales to farmers by states). If, then, subsidy was paid before actual sale to farmers, by the same logic, the money can be given to farmers.

If this crucial point is addressed, there won't be any reason for farmers to worry. But, the bottleneck is at the doorstep of the government.

The government is prone to providing much less funds for fertiliser subsidy than required, leading to a pile up of arrears-according to Fertiliser Association of India, the current year is likely to end with whopping dues of Rs  60,000 crore to the industry. The petition of manufacturers to the ministry of finance does little to ensure adequate allocation even as the latter is obsessed with managing fiscal deficit.

However, under DBT, the government cannot continue with business as usual. It will be forced to provide adequate allocation to meet all needs in full, and ensure that no dues are kept pending, or else, it will invite the wrath of farmers, which will be politically suicidal. That will take away the flexibility it currently enjoys to manipulate expenses in sync with the fiscal target. Hence, it is unable to muster courage to switch over the benefit of the DBT to farmers.

The other factors include its unwillingness to discontinue the protection of public sector plants including those being revived, viz Sindri, Gorakhpur, etc, available under NPS; vested interests in continuing with import of urea (currently, this is allowed only through state agencies such as MMTC, STC, etc) and the bureaucracy which doesn't wish to let go of its discretionary powers.

The business-as-usual approach is unsustainable. The government should switch to the policy of DBT to farmers. This will empower them to make the right choices based on crop/soil need, reduce imbalance in fertiliser use, improve efficiency in the supply chain and give a boost to 'Make in India'. It will save quite a lot on the subsidy by eliminating misuse, and owing to better targeting. Further, need not fear falling short of funds even while achieving the fiscal target.

The writer is Policy analysy, www.uttamgupta.com Views are personal