Armed with Cabinet approval, Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee seem all set to introduce the new nutrient-based subsidy (NBS) policy for fertilizer pricing in the Union Budget to be presented on February 26. The move has generated controversy with the Left parties attacking it as anti-farmer and even parties within the United Progressive Alliance government such as the Dravida Munnetra Kazhagam expressing reservations about the impact of the new policy on the farm gate price for fertilizers. If the sole purpose behind the NBS policy was to promote the balanced use of different nutrients like nitrogen, potash, phosphorous, and sulphur, there would be no reason for anyone to object. The excessive use of urea, for example, has pushed nitrogen in the soil to a high level in many parts of India, affecting crop production. That certain nutrients are used indiscriminately because of price despite their inappropriateness for particular crops, soil and local ecologies is a problem that needs to be addressed, in part, by the revival of agricultural extension services that were one of the first casualties of the reforms process two decades ago. But the proposed fertilizer subsidy scheme stems from another impulse: the desire to decontrol prices.

While assurances have been sought, and reportedly received, from the fertilizer industry that the price line would be maintained around the current level during the 2010 kharif season, there are sound reasons to worry about what will happen to fertilizer prices thereafter. The squeeze on India's farmers began way back in 1991 when Finance Minister Manmohan Singh first began to reduce the fertilizer subsidy. As input prices increased, farmers, especially those with marginal, small, and medium holdings, reduced their fertilizer consumption with detrimental effects upon yields. The price mismatch across different nutrients further complicated the picture. The NBS policy might make all fertilizers available at uniform rates, thus allowing the farmer to choose what is best for his land without worrying about opportunity cost. But if overall prices start rising, farmers are likely to cut back. That this is more than likely to happen is clear from the reaction of the industry. From the retention price system of the 1970s to the price system prevailing now, fertilizer companies have been clear that the only way they can realise their “full potential” is by full decontrol. Short of that, the industry was lobbying for a nutrient-based fixed subsidy alongside the freedom to set the maximum retail prices (MRPs). The UPA's new policy is in line with this wish.

More In: Editorial | Opinion