In the second half of 2008 international fertiliser prices soared to historic levels. India, which imports significant amount of finished fertiliser and raw material, had no option but to continue to import at higher prices to meet domestic demand. The result was a massive and unsustainable subsidy level, almost Rs 90,000 crore.
With just Rs 30,000 crore was allocated in the budget — and when off-budget mechanisms like bonds were used to pay the arrears owed by the government to the industry — the blame game between industry (which argued that high import price and fixed prices by the government had made business impossible) and the government (which argued that industry had become lazy as the cost plus subsidy system had led to companies paying little regard to efficiency gains and competitive importing) began in earnest.
Surprisingly, even amidst this panic and pressure (from the obvious competing goals of finance and agriculture ministries, on the one hand, and a looming general election on the other), the fertiliser department had been working on a reform agenda and slowly building a consensus — both among department mandarins themselves, as well between the government departments and industry bigwigs.
The cornerstone of this new agenda was the shift from the cost plus subsidy system to a nutrient-based subsidy system — a move that would address several issues bedevilling the fertiliser sector. Mainly, the core issue of balanced use of fertilisers — key to growing yields — would be taken head on. Balanced fertiliser use had been stifled, as only select products were subsidised. Other fertilisers received no subsidy or their prices were fixed without any regard to their nutrient content. Freeing MRPs from government control would be the only way to ensure production peaks, and imports are carried at the most competitive levels.
The other core theme of the new strategy involved direct subsidy to the farmer instead of the manufacturer. Arguably, in the absence of a ready delivery mechanism (for instance, Kisan Cards and bank accounts for farmers), this was a pipe dream. However, in the 2008-09 budget speech, the then finance minister Chidambaram announced that a new system of kisan cards would be tried out on a pilot basis in select areas. Since then, some measures were taken to issue the cards. However, in the absence of a clear mandate to the banks, the process has been somewhat slow.
From then on, there have been several developments. Due to the tough and unrelenting stance of the fertiliser department and the Indian industry, and given India’s status as a big importer, prices of key products like DAP and phosphoric acid have fallen. As the result, the import bill and subsidy outgo have reduced considerably from 2008 levels. This is good news. Yet a note of caution is warranted, as crisis can act as a catalyst for radical reform.
The 2009-10 budget speech signalled the continuation of both the nutrient-based subsidy scheme as well as the direct transfer of subsidy to farmers. There has also been no change at the bureaucratic level — key bureaucrats who worked relentlessly on the reform agenda are in place. Their analysis on a well thought-out and phased reform plan in which all parties will have time to react and rebuild is in place. Most notably, the secretary, who intends to move the fertiliser department away from being a subsidy management machine to one that focuses on strategic acquisitions and joint ventures, is still the man in charge.
The only difference is that there is a new minister in place. Observers have so far given him the benefit of the doubt, he needs time to understand the stakeholder impact of reform that has been in the making. Farmer and industry interests are precariously balanced — and so are political compulsions. But the minister must know that there is a finite amount of time before the prices rise again, before industry gets cold feet, and another election comes around.
He will have to start taking decisions soon. Indeed, all that is now required is the will to get on with reform — even if it is done in a phased manner and through several well-planned pilot schemes where implementation issues are identified and rectified. The mandarins are ready, the masters must sign on and industry must adapt. It is time to reform now as the stars may not align again so neatly in the near future.
Source : The Economic Times