India ₹1 trillion subsidy planned on fertilizers in next fiscal

The fertilizer department has proposed a subsidy of ₹1 trillion for the next fiscal after having cleared the backlog to producers, which has taken the total subsidy payout in this fiscal to ₹1.36 trillion, including an extra allocation of ₹65,000 crore made as part of the economic stimulus package, according to a government official privy to the discussions.

The government may also roll out an ambitious scheme to transfer the subsidy directly to the bank accounts of potentially 140 million farmers in the country, instead of financing manufacturers who at present sell at subsidized prices, the official said, requesting anonymity.

Fertilizer subsidy has been around ₹70,605 crore and ₹79,998 crore in FY19 and FY20, or 10-11% of the Centre’s total spending on various schemes. The increase in the current fiscal and the next is expected to widen the Centre’s fiscal deficit.

One priority for the next fiscal is to extend the direct benefit transfer (DBT) scheme in the sector to farmers. At present, the scheme, which was rolled out as a pilot in 2017 and extended nationwide in 2018, transfers subsidy to manufacturers based on data captured in the point of sale (PoS) devices at the retail shop. Using sales data captured on a real-time basis for subsidy payment was an improvement over the previous system, which relied on the audited books of producers. In FY19, this had led to savings of about ₹10,000 crore, but it is hard to calculate the savings in subsequent years as factors such as fertilizer sales and price of natural gas used in urea production fluctuate, the official said

Now, the effort is to transfer the subsidy directly to the bank accounts of farmers.

The government’s rollout of the DBT scheme in fertilizers has so far been low key owing to the complexities involved and the fact that it is still given to manufacturers though it is driven by technology and based on transaction data captured at the retail level.

“Discussions are at present on about the universe of beneficiaries to be covered, the definition of farmers under the scheme, and the practical aspects of it. The intent is to cover every farmer, including tenant farmers, those tilling panchayat land, and land-owning farmers. One possibility is to begin the scheme on a pilot basis," the person said.

At present, PM Kisan Yojana, the income support scheme for farmers, covers only landowners and benefits over 100 million farmers; it offers a big part of the data required for the fertilizer-DBT project. A key task for the government is to ensure that landowners do not pocket the subsidy meant for farmers.

The government’s goal in revamping the subsidy scheme is to make sure plant nutrients are used in a balanced way, diversion of fertilizer across national borders is checked, and subsidy payment is correctly targeted to the farmer.

“If the DBT is to be rolled out, wherein farmers directly get the subsidy, similar to LPG subsidy, timely payment of subsidy to the farmers’ bank accounts is the key to the success of the programme. While the government can easily capture bank account details of farmers, in absence of timely payment of subsidy, farmers will be put to inconvenience as the market price of fertilizers could increase by 40% in the case of NPK (nitrogen, phosphorus, potash) fertilizers and 250% in the case of urea," said K. Ravichandran, deputy CRO at rating agency ICRA Ltd.