Historic increase in Subsidy on NPK Fertilizers and it's impact

Fertilizers are an Essential Commodity for ensuring Food Security in the country. Naturally it's prices are closely monitored. Urea being one of the widest used Fertilizers owing to its controlled costs by the Central Government. On the other hand, NPK Fertilizers (Nitrogen-Phosphate-Pottash and Sulphur) are decontrolled and effectively priced by the industry based on competitive pricing. The subsidy paid in Urea is based on escalating costs of production whereas the Selling Price is fixed. In comparison the subsidy in NPK Fertilizers is Fixed and based on Nutrient components (NPKS).

Recently the Union Government raised subsidy on DAP fertiliser by 140% from Rs 511 to Rs 1,200 per 50-kg bag which was hailed as pro-farmer initiative. This was more required to maintain the affordability of NPK Fertilizers and boost its sales against the skewed use of Urea which is more affordable owing to subsidies. This will also create a more balanced approach in soil health and crop diversity.

Though the Farmers would benefit with the above discount as their cash flows would significantly improve prior to the Kharif sowing season, the public exchequer's bill footed by the Tax Payer will have to bear the brunt. Moreover the industry shall have to foot the additional subsidy claim and hope the repayments are done on time. Else the cash flow cycle of Fertilizer firms maybe possibly offset with increased borrowings to fund the gap between revenue through low sales price and thereafter realization through subsidy payout.

It would have been interesting if the scheme was implemented wherein the price per bag wouldn't have been reduced but the difference on market price would have been directly credited to the Farmers bank account through DBT Scheme (Direct Benefit Transfer).

Although prices of non-Urea Fertilizers were decontrolled by the Government post implementation of Nutrient Based Subsidy (NBS), there remains an effective control from time to time on its prices. This not only creates a situation wherein Market based pricing is not effectively realized but the payout of around Rs. 1 Lac Cr as subsidies puts additional pressure on budget and thus planned expenditure. Slowly but steadily the Government must come out of subsidies as was partially implemented for the Auto Fuels and let the market determine its own price based on affordability to Farmers.

Views above are personal to the Author.