Urea may be shifted to nutrient-based subsidy regime

Buried in the Budget fine print is another big-ticket reform. The documents reveal that the Modi government plans to increase the administered price for urea “immediately” and move to a new nutrient-based urea policy.

The Centre’s subsidy policy is widely blamed for the overuse of urea on Indian farms. Urea is the only fertilizer that remains under statutory price control and its maximum retail price is fixed by the government.

The difference between production cost and the administered concessional price is allowed as subsidy. For the purpose of the calculation of the subsidy element, the Fertilizer Ministry, in consultation with manufacturers, determines the production cost for every urea plant separately. As a result, the manufacturers’ lobby is opposed to reform.

The other fertilizers were brought under the nutrient-based subsidy regime by the previous government by which subsidy is not paid to the manufacturer on the basis of the production cost. Instead, the quantity sold is taken into account.

The Modi government’s decision to bring urea under the nutrient-based subsidy regime assumes significance as the reform was first proposed by the Manmohan Singh government. The United Progressive Alliance shifted other fertilizers to the new subsidy regime but not urea owing to the then Fertilizer Minister M.K. Alagiri’s resistance to the reform. Saying that his Ministry’s proposal for fertilizers to be shifted to the new subsidy regime had ended up including urea also without his knowledge as he did not understand either English or Hindi, Mr. Alagiri had the Cabinet approve the reform for all fertilizers but urea.

As a result, urea is the only fertilizer that continues to be subject to price distribution and movement control under the Fertilizer Control Order issued under the Essential Commodities Act.

If the Modi government bites the bullet on urea subsidy, Finance Ministry officials estimate, the resultant fertilizer subsidy savings this year could be about Rs. 20,000 crore, enough to enable Union Finance Minister Arun Jaitley meet the challenging fiscal deficit target.