The Hindu : Flawed policy

Online edition of India's National Newspaper
Friday, Oct 11, 2002

Opinion

Opinion - Editorials

Flawed policy

IN TYPICAL MINISTERIAL fashion, the Group of Ministers (GoM) that was asked to prepare a new fertilizer policy has come out with a draft that puts the difficult issue of urea pricing on the backburner. A policy that does not deal with the subsidy on urea, accounting for the overwhelming bulk of the subsidy on fertilizers, can hardly be called a policy. The draft now goes to the Union Cabinet which will hopefully show greater determination than the ministerial sub-group in dealing with the core issues. In the end, the set of recommendations that the GoM has laboured to produce turns out to be only a watered down version of the package suggested by the Expenditure Reforms Commission (ERC) 18 months ago.

For more than a decade, a number of Governments at the Centre have tried without much success to reform a policy that encourages inefficiency in production and simultaneously hands out huge subsidies for use of fertilizers, especially of urea. The Government has periodically tried to revise urea prices, but, in the face of pressure from the farm lobby, it has had to inevitably partially "roll back" the hikes. While the prices of phosphatic and potassic fertilizers have been decontrolled, the continued subsidy on urea has also meant that the application of fertilizers has been skewed in favour of the nitrogenous variety that has been detrimental to the soil. On the production side, the continuation in its basic form of the 1977 retention price system, which is based on a normative cost of production plus a 12 per cent return on net worth, has only encouraged inefficiency. To deal with what is in effect the subsidisation of both producers and consumers, the ERC had proposed a decontrol programme that would be phased over five years beginning in February 2001. The core elements were a movement, initially, to group-based concessional pricing for producers of urea, a 7 per cent annual increase in urea prices in real terms, dual pricing to protect small and marginal farmers from the price hikes; ending in full decontrol of producer and consumer prices in April 2006. All that the GoM has now done is to increase the number of groups of manufacturing units (based on feedstock use and the age of the plant) from five to six and to recommend that the first phase begin in April 2003. Two years have been lost then for no purpose other than to tinker with the original set of recommendations.

The ministerial group has reportedly shied away from making any suggestions on urea pricing because of the sensitive nature of the issue. It is precisely because of the potential political implications of a hike in urea prices that the matter was referred to a GoM, which has only taken the easy way out of further postponing taking a final decision on the issue. But a never-ending delay in tackling the issue of urea prices only makes it more difficult to gradually phase out the consumer subsidy. The consumer subsidy in urea is huge, now close to 50 per cent of the cost of production. The fertilizer subsidy was introduced a quarter of a century ago, in 1977, in order to encourage the use of these chemical inputs. Since then, the application of chemical fertilizers has steadily increased and now parts of the country even report the excessive and indiscriminate use of this input for agriculture. It certainly will not be easy for farmers to absorb the removal of the subsidy at one shot. That was why the ERC had suggested a moderate annual increase in prices that would enable farmers to cope with higher costs. Of course, farm prices will have to be correspondingly adjusted upwards and the small and marginal farmer protected at least partially from the gradual removal of the subsidy. These are apparently not approaches that the GoM thinks are worth considering.

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