Have to move to cash transfers at the earliest
The backdrop of a poor crop, and the possibility of a poor monsoon, is not the best time to cut urea subsidies—right now, urea prices are at around 30% of the market prices—so it is not surprising the government’s latest urea policy has contented itself with minor changes while leaving subsidies untouched. While the change in efficiency norms made by the policy are welcome, the total savings, to use even the government number, is a mere R4,829 crore over a period of 4 years. That’s R1,200 crore a year as compared to the FY16 fertiliser subsidy of R73,000 crore and another R40,000 crore of arrears. It is here that the government needs to take a more holistic picture as well as be more brave. A CACP report, for instance, had pointed out that since fertiliser costs are around 5% of total costs, a 30% hike in them would hike farmer input costs by only 1.5%—sadly, even this kind of cut in subsidies has not been attempted or any roadmap indicated as to how subsidies are to be phased out. As a result of urea prices being so low, in states like Punjab and Haryana, the NPK ratio is 62:19:1 as compared to the ideal of 4:2:1. While farmers are unnecessarily spending on more urea, the soil is also getting hurt—this is the reason why the prime minister introduced soil health cards some months ago.
In such a situation, as ICRIER professor Ashok Gulati has pointed out, the government would do well to start using cash transfers. Given that non-farm use, as well as smuggling of urea is supposed to be in the region of 15-20%, this will at least help reduce that. Over the longer term, and this is linked to overall reforms, the government needs to move towards per acre subsidies in the farm sector and deregulate the fertiliser sector completely. If the government is able to, for instance, save R30,000-40,000 crore from moving to cash transfers instead of physical rations, this money can be transferred to the Aadhaar accounts of small farmers who can then use this to buy unsubsidised fertilizers—indeed, once soil cards have been given out across the country, it would be a good idea to link subsidy availability to this. Apart from restoring the health of the soil, deregulating the fertiliser sector will also lead to its healthy growth—fertiliser production in India remains stunted in comparison with other countries like China. What is worrying, though, is that despite several committee reports including one by the Shanta Kumar committee and the prime minister’s decision to move towards soil-health cards, little has been done about freeing up the agriculture/food or fertiliser sector.