A Faulty Fertilizer Subsidy Policy Will Worsen India’s Farm Distress

Context: The policy decision to increase subsidy for di-ammonium phosphate (DAP) fertiliser from Rs 500 to Rs 1200 per bag does provide immediate relief to farmers but maybe create problems in the long run.

Policy bias towards urea-based fertilisers: Nutrient Based Subsidy regime introduced in 2010 decontrolled prices of complex fertilisers while continuing to administer price of urea.

• Implications:
  • Price rise of complex fertilisers: This resulted in a price rise of complex fertilisers triggering a shift in demand to urea.
  • Black marketing: A rise in black marketing of urea also led to an increase in its prices.
  • Fall in consumption: As Indian farmers are price sensitive.
    • Total fertiliser consumption declined from 28.1 million tonnes in 2010-11 to 24.5 million tonnes by 2013-14.
    • While it had recovered to 27.4 million tonnes by 2018-19, it is yet to reach pre-NBS consumption levels.
    • Recovery was largely due to a 1-million tonne rise in consumption of nitrogenous fertilisers (mainly urea) against a matching decline in phosphatic fertiliser consumption.
  • Impact on soil: It has led to a decline in the fertility of the soil (also raising input costs) due to a distorted ratio of nutrients.
    • Recommended ratio of the nutrients N (nitrogen), P (phosphorous) and K (potassium) is 4:2:1.
    • In 2010-11, it was 4.7:2.3:1, worsened to 8.0:2.7:1 by 2013-14, before improving slightly to 6.3:2.5:1 by 2018-19.

Issues with the latest policy decision to increase subsidy for DAP fertiliser

• Causing distortions in relative prices of various complex fertilisers: Though the increased subsidy does subdue the hike in DAP fertiliser price, it is limited to DAP only, leaving out other complex fertilisers at high prices. This could encourage the adoption of an adverse fertiliser mix.
• Adversely impact profitability of farming: By impacting input costs of agriculture.
  • Wholesale price index (WPI) showed a decline in farm-gate prices, WPI for cereals was negative for the eighth consecutive month and vegetable prices saw a decline for last six months.
• Likely to hurt economic recovery: As most non-farm input prices like that of diesel is witnessing a sharp increase and there is a demand compression, a drop in crop prises could worsen agrarian crisis.