Given the huge gap between prices of subsidised and imported urea—$86 per tonne versus $300, respectively—the Modi government’s plan to start decontrolling urea over the next three years appears fraught with risk; according to sources, the next budget is likely to announce decontrol of urea. More so, given that, unlike in the past, sharp hikes in the minimum support price of farm produce to take care of the urea price hike no longer look possible in view of their inflationary potential. A related problem that has arisen, as a result of not fixing urea prices at market levels, is that India’s local production has hardly grown over the last decade—while China’s production grew from 22 million tonnes in 2000 to nearly 50 million by 2012, India’s grew from 11 million tonnes to just 12 million.
Fortunately, the solution to the problem isn’t really that tough as a recent Commission for Agriculture Costs and Prices (CACP) report points out. According to the CACP, the most important thing to keep in mind is that, as a proportion of total cost of production, fertiliser costs are just around 5%—so, if fertiliser costs are increased by 30%, the hike in overall farmer costs will be a mere 1.5%. Even so, in an atmosphere of suppressed MSPs, farmers are unlikely to take kindly to even a small hike in their costs due to a hike in urea prices. Which is where the government needs to link the hike in prices of urea to overall farm income support. With urea prices so low in comparison with other fertilisers, the NPK ratio has deteriorated dramatically from 4.7:2.3:1 in 2010-11 to 6.7:3:1 in 2011-12, with deleterious effects on the productivity of the soil. If farmers are given soil cards, they will automatically understand that excessive use of urea is hurting their soil. Since moving away from urea will cost them extra, a good way to manage the transition is to give farmer direct cash subsidies—based on their acreage in place of the current MSP-based support—and to link this to the health of the soil. Better NPK ratios will increase the productivity of the soil and higher urea prices, in turn, will prevent the use of urea for non-farm uses as well as stop it being smuggled to neighbouring countries. Also, since the price of Indian urea ranges from $150 per tonne to $800 per tonne—the price, by and large, depends upon whether gas prices are made available at a fixed rate of $4 per mmBtu or whether they are imported at even as high as $20—it is important that the government ensure adequate supplies of gas and also pool these prices.