Fertilizer and fertilizer subsidy

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Fertilizer and fertilizer subsidy

Fertilizers are chemical compounds or substance that contains elements which are necessary for the growth of plant and flowers. There are mainly two types of fertilizers organic and inorganic. Organic fertilizers are those which are made through natural process like decomposed plants such as manure, worm castings, peat moss, seaweed, sewage and guano, whereas inorganic fertilizers are manufactured through chemical process. They are in the form of simple compounds mainly of nitrogen, phosphate and potash.

Basic Fertiliser Elements (N-P-K)

Whenever you read about feeding plants the letters N P and K will inevitably used. These letters stand for the basic fertiliser elements which are Nitrogen (N) Phosphorus (P) and Potassium (K). 

Each of these elements supply specific benefits to growing plants and are essential for various growing requirements and whilst most plants will need all 3 elements to grow successfully. In general the benefits of these 3 elements are as follow:-

Nitrogen (N) – encourages healthy foliage growth – beneficial to leafy vegetables such as cabbages, lettuce and spinach

Phosphorus (P) – encourages root growth – essential for all plants

Potassium (K) – encourages bigger, healthier blooms and fruit – beneficial for fruit, flowers and vegetables such as tomatoes, aubergines and peppers.  Potash is the common name given to a water soluble form of potassium so has the same attribute

Types of fertilizer

Fertilizer is an essential part of growing plants. It adds nutrients and texture to soil to provide nutrients to trees, vegetables, herbs, shrubs and flowers. There are several ways to categorize fertilizer, and the most basic is whether it is organic or inorganic. 

  • Organic Fertilizer: Organic fertilizer is all natural and includes things such as bat guano, compost, peat moss, wood ash and manure. These are general soil amendments. One advantage of using compost as a fertilizer is that it won’t burn plants or poison pets. It also does not require a specific timetable of application and watering because of the slow-release of nutrients. They can have long-term positive effects on the soil without damaging groundwater.
  • Inorganic Fertilizer: Inorganic fertilizers are primarily derived from chemical compounds, either mineral or synthetic. They typically come as a powder, pellets, granules or a liquid. Most inorganic, concentrated fertilizer is rated based on the percentage of nitrogen, phosphorous and potassium. Other chemicals that might be included in inorganic fertilizers include calcium, sulphur, iron, zinc and magnesium. Chemicals are generally lighter and easier to transport than their organic counterpart. It also can be classified according to its ingredients, whether it is solid or liquid.

Based on nutrient:

  • Nitrogen-Based Fertilizer: Nitrogen plays a vital role in the protein formation process of plants. It supports overall plant growth and the development of healthy leaves. Nitrogen fertilizer refers to one of the most common categories of fertilizers produced out of nitrogen chemical combinations. Most of nitrogen based fertilizers are made from the ammonia (NH3), which is produced by the Haber – Bosch process. Plant and animal by-products are also the most common source of nitrogen based fertilizer.
  • Phosphorus-Based Fertilizer: Phosphorous aids in root and flower development and increases the rate of growth. It is used by plants to store and transfer energy. Steamed bone meal is a common source of phosphorus in the garden.
  • Potassium-Based Fertilizer: Fruit trees, potatoes and chillies need a potassium-releasing fertilizer. Muriate of potash and sulphate of potash are readily dissolved into soil. Sandy soil will especially appreciate this treatment.

On basis of state:

Liquid Fertilizers: Liquid fertilizers are fast-acting. Product can be delivered directly to a grower in the blend their farms need.  This saves the farmer both time and money. Nutrition can be placed in the root zone for maximum uptake. Since they’re quickly absorbed, they require application every two to three weeks.

Solid Fertilizers: Solid fertilizers are applied dry and must be watered in. Solid fertilizers are easier to control because you can decide how much fertilizer you’re using and where it’s being dispersed. They are normally applied with mechanical spreaders.

  • Solid fertilizers are produced in two different formulations: quick-release and slow-release.
    Quick-release fertilizer normally lasts for three to four weeks, depending upon the temperature and the amount of rainfall.
  • There are two main types of slow-release fertilizers: water-soluble nitrogen fertilizers (WSN) and water-insoluble nitrogen (WIN), available for specific applications.

On basis of number of nutrients:

Fertilizers that contain only one primary nutrient are referred to as straight fertilizers. Those containing two or three primary nutrients are called multi-nutrient fertilizers, sometimes also binary (two-nutrient) or ternary (three-nutrient) fertilizers.

  • Straight fertilizers: Some of the most important (as well as the regionally important) straight fertilizers are as follows:
    • Urea, with 46 percent N, is the world’s major source of nitrogen due to its high concentration and its usually attractive price per unit of N.
    • Ammonium sulphate (AS) It is used by preference on irrigated crops and where sulphur has to be applied.
    • Calcium ammonium nitrate (CAN) is a fertilizer of preference on crops in semi-arid regions of the subtropics.
    • Other example: Triple superphosphate, Muriate of potash

Multinutrient fertilizers: A large number of multi-nutrient fertilizers are offered on the world market fertilizers. The most noteworthy advantages of multi-nutrient fertilizers to the farmer are: ease of handling, transport and storage; ease of application; high nutrient content; even distribution of nutrients in the field; Balanced fertilization, i.e. nitrogen, phosphate and potassium available together from the start and in accordance with plant requirements; and high fertilizer efficiency.

In general, there are three distinct types of multi-nutrient fertilizer:

  • Complex fertilizers: manufactured through processes involving a chemical reaction between the constituents containing the primary plant nutrients (each granule contains the declared ratio of nutrients);
  • Compound fertilizers: granulated straight fertilizers or intermediates, the granules containing the nutrients in varying ratios;
  • Mixed fertilizers or blends: simple mechanical mixtures of straight fertilizers (the mixture may not be homogeneous if care is not taken).

Consequences of excessive use of fertilizers:

Excessive nutrients can cause adverse effects on plant growth, increase the potential for environmental contamination due to leaching, and represents a waste of resources. In particular, above optimum nitrogen and phosphorus levels can lead to excessive plant and algal growth in waterways that can degrade drinking water, fisheries, and recreational areas. High potassium can lead to an imbalance of base saturation levels as well as high soluble salts High calcium and magnesium levels are commonly associated with pH values above 7.0. In addition, high organic matter levels can cause poor drainage

  • Depletes the Quality of the Soil

Using too much of fertilizers in the soil can alter the fertility of the soil by increasing the acid levels in the soil.

  • Biology of Water Bodies

When you use too much of fertilizers in the soil, it leads to eutrophication. Fertilizers contain substances like nitrates and phosphates that are flooded into lakes and oceans through rains and sewage. These substances prove to become toxic for the aquatic life, thereby, increasing the excessive growth of algae in the water bodies and decreasing the levels of oxygen. This leads to a toxic environment and leads to death of fish and other aquatic fauna and flora. Indirectly, it contributes to an imbalance in the food chain as the different kinds of fishes in the water bodies tend to be the main food source of various birds and animals in the environment.

  • Human Health

The nitrogen and other chemicals present in the fertilizers can also affect the ground waters and waters that are used for the purpose of drinking. One of the most common results for this can be the development of blue baby syndrome which occurs in infants whose skin tissues are low in oxygen, which is why their skin appears to be blue or purplish in color

  • Climate Changes across the Globe

Fertilizers consists of substances and chemicals like methane, carbon dioxide, ammonia, and nitrogen, the emission of which has contributed to a great extent in the quantity of greenhouse gases present in the environment. This in turn is leading to global warming and weather changes. In fact, nitrous oxide, which is a byproduct of nitrogen, is the third most significant greenhouse gas, after carbon dioxide and methane.

Fertilizer subsidy:

For sustained agricultural growth and to promote balanced nutrient application, it is imperative that fertilizers are made available to farmers at affordable prices.

  • With this objective, urea being the only controlled fertilizer, is sold at statutory notified uniform sale price, and decontrolled Phosphatic and Potassic fertilizes are sold at indicative maximum retail prices (MRPs).

 

The problems faced by the manufactures in earning a reasonable return on their investment with reference to controlled prices, are mitigated by providing support under the New Pricing Scheme for Urea units and the concession Scheme for decontrolled Phosphatic and Potassic fertilizers. The statutorily notified sale price and indicative MRP is generally less than the cost of production of the irrespective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers.

As the consumer prices of both indigenous and imported fertilizers are fixed uniformly, financial support is also given on imported urea and decontrolled Phosphatic and Potassic fertilizers.

 

Till 2003, the subsidy to urea was under the provisions of the Retention Price Scheme (RPS). Under RPS, the difference between retention price (cost of production as assessed by the Government plus 12% post tax return on net worth) and the statutorily notified sale price was paid as subsidy to each urea unit.

Later the RPS regime was dismantled and a Concession Scheme for urea units based on the prices of feedstock used and the vintage of plants was introduced in 2003. This was called New Pricing Scheme or NPS.

  • It had various phases like NPS-I (2003-2004), NPS-II (2004-2006) and NPS-III (2006 onwards).

The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers.

  • Urea is the only controlled fertilizer, which is sold at statutory notified uniform sale price.
  • The Phosphatic and Potassic fertilizes are under a decontrolled regime and are sold at indicative maximum retail prices (MRPs).

However, the New Pricing Scheme resulted in distortion of the market. The fertilizer companies started bleeding due to fixed Urea prices and rising cost of Inputs such as Natural Gas and Naphtha as 80% of the production of urea in India is gas-based.  The government increased the prices of Urea but still the prices have been skewed. At present, the urea-based fertilizers cost Rs. 5,360 per tonne, while the potash and phosphate fertilizers cost Rs. 24,000 per tonne. Since, Urea is available at such a cheap price that people not only started unbalanced use of this fertilizer but also misused it by illegally exporting, preparation of adulterated milk etc.

Urea Decontrol There has been a long pending demand of decontrol of Urea but decontrolling urea is a politically sensitive issue. The Planning Commission’s Soumitra Choudhary panel had recommended that the NBS policy, which is applicable only on P and K fertilisers needs to be extended for urea also. This has become all the more desirable to maintain the ratio between MRP of urea vis-a-vis P and K fertilisers, which is essential for balanced fertilisation.

Nutrient Based Subsidy (NBS) scheme:

To foster the balance use of fertilizers; government is implementing Nutrient Based Subsidy (NBS) policy w.e.f. 1st April 2010 for fertilizers other than Urea. The fertilizers included in this scheme include 22 grades of decontrolled fertilizers namely DAP, MAP, TSP, DAP Lite, MOP, SSP, Ammonium Sulphate and 15 grades of complex fertilizers.  

  • These fertilizers are provided to the farmers at the subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
  • Additional subsidy is also provided on the fertilizers fortified with secondary and micronutrients as per the Fertilizer Control Order such as Boron and Zinc.
  • This subsidy given to the companies is fixed annually on the basis of its nutrients content (i.e. Nitrogen, Phosphate, Potash and Sulphur).
  • Under this scheme, Maximum Retail Price (MRP) of fertilizers has been left open and manufacturers/marketers are allowed to fix the MRP at reasonable level.  However, this scheme failed to produce any result mainly due to huge difference in prices of Urea and other fertilizers.

Distortion in subsidy and reforms:

Distortions in urea are the result of multiple regulations.  First, there are large subsidies based on end use—only agricultural urea is subsidised—which creates incentives to divert subsidised urea to industry and across the border. 

In fact, subsidised urea suffers from 3 types of leakage:

  • 24 per cent is spent on inefficient urea producers
  • Of the remaining, 41 per cent is diverted to non-agricultural uses and abroad;
  • Of the remaining, 24 per cent is consumed by larger—presumably richer— farmers.

These leakages imply that only 35 per cent—about Rs 17,500 crore of the total urea subsidies of Rs 50,300 crore—reaches the intended beneficiaries, small and marginal farmers. 9.5

Second, under-pricing urea, relative to other fertilisers, especially P & K, encourages overuse, which has resulted in significant environmental externalities, including depleted soil quality. 

Third, multiple distortions—price and movement controls, manufacturer subsidies, import restrictions—feed upon each other, making it difficult to reallocate resources within the sector to more efficient uses.  The fertiliser sector is thus one example of the exit problem that bedevils the Indian economy

Various leakages:

Leakage 1 – Black Market: Urea is only subsidised for agricultural uses.  Subsidies like this violate what we call the One Product-One Price principle—the intuition that products which are essentially the same should be charged essentially the same price, else there will be incentives to divert the subsidised commodity from eligible to ineligible consumers.  The 75 per cent subsidy on agricultural urea creates a large price wedge which feeds a thriving black market diverting urea to industry and possibly across the border to Bangladesh and Nepal.

Black market effects are aggravated by a further regulation—canalisation.  Only three firms are allowed to import urea into India, and the canalisers are also instructed when to import, what quantities to import, and in which districts to sell their goods. Forecasting fertiliser demand is a difficult business, and misestimates— especially shortages— are difficult to correct because the system to procure imports is time consuming. The entire process—from the time the Fertiliser Department decides to import to the time urea reaches consumer centres—takes about 60-70 days.  These delays can exacerbate shortages, and are particularly costly during the peak demand period when timely availability of urea is essential for proper plant growth.  Farmers are thus pushed to purchase in the black market.

Leakage 2 – Small Farmer Inability to derive full benefits: The black market hurts small and marginal farmers more than large farmers since a higher percentage of them are forced to buy urea from the black market.  This regressive nature is characteristic of black market rationing and happens because large farmers are typically better connected and therefore able to secure scarce subsidised urea.  On average this extra expenditure is 17 per cent, and in some states—Punjab, UP and Tamil Nadu— it is between 55 and 70 percent.  

Leakage 3 – Inefficient Fertiliser Manufacturers: A third source of leakage arises from some of the urea subsidy going to sustaining inefficient domestic production instead of going to the small farmer. Today, there are 30 manufacturing units with varying levels of efficiency. The objective of self-sufficiency has meant a preference for survival and an associated willingness to countenance inefficiency. This has led to a model where the subsidy a firm receives is based on its cost of production: the greater the cost, the larger the subsidy. As a consequence, inefficient firms with high production costs survive and the incentive to lower costs is blunted. 

Reforms:

A reform package would address each of the problems identified above—the three leakages and skewed mix of fertiliser use—with the primary aim of benefiting the small farmer. 

First, decanalising urea imports—which would increase the number of importers and allow greater freedom in import decision–would allow fertiliser supply to respond flexibly and quickly to changes in demand.  This would be timely as climatic fluctuations are making it much more difficult for governments to forecast agricultural conditions and centrally manage supply.  This would reduce the likelihood and severity of shortages, decrease black marketing and thereby benefit the small farmer.   

Second, bringing urea under the Nutrient Based Subsidy program currently in place for DAP and MOP would allow domestic producers to continue receiving fixed subsidies based on the nutritional content of their fertiliser, while deregulating the market would allow domestic producers to charge market prices. This would encourage fertiliser manufacturers to be efficient, as they could then earn greater profits by reducing costs and improving urea quality. And this in turn would benefit farmers.

Turning fertiliser into JAM The case for implementing direct transfers in fertilisers is to reduce leakages to the black market.  The government’s policy of neem-coating urea is a step in exactly this direction. Neem-coating makes it more difficult for black marketers to divert urea to industrial consumers.  Neem-coating also benefits farmers by reducing nitrogen losses from the soil by providing greater nutrient to the crop.  As a result, farmers need less urea to achieve the same effect.  Technology could be further used to curtail leakages and improve targeting of fertiliser subsidies.  Fertiliser is a good sector to pursue JAM because of a key similarity with the successful LPG experience: the centre controls the fertiliser supply chain.  Ideally fertiliser subsidies would be targeted only at small and marginal farmers.  But targeting the poor is difficult at the best of times, and assessing poverty—based on landholdings or some other measure—will be difficult.  A second problem emerges with targeting tenant farmers and sharecroppers. The Situational Assessment Survey of Agricultural Households reveals that a little over 10 per cent of all farmers are tilling someone else’s land, and cash transfer design should be careful not to exclude these typically landless farmers who would need the subsidy most.  The relatively low levels of last-mile financial inclusion in much of rural India also suggest that it would be risky to replace subsidised fertiliser with cash, due to beneficiaries’ weak connection to the banking system.

Recent proposed changes:

In a move to promote the balanced use of fertilizers and reduce the overuse of urea, the government on July 6, 2016 cut retail prices of non-urea based fertilizers by up to Rs.5, 000 per tonne.

Major public sector companies producing fertilizers have decided to reduce the retail price of diammonium phosphate (DAP) by Rs.2, 500 per tonne and muriate of potash (MOP) by Rs.5, 000 per tonne.

Government has ensured that there is no shortage of fertilizers in the country, and the latest move to reduce prices of non-urea based fertilizers will translate into a savings of Rs.4, 500 crore for farmers.

The decision was taken following a meeting with leading manufacturers where the ministry emphasized the need to transfer the benefits of reduced input costs in producing fertilizers to farmers.

The farmer-friendly move from the centre comes on the back of a decision to make 75% of urea produced in the country neem-coated to prevent diversion for industrial use. Further, the government has, since 2014, been running a soil health card scheme to promote balanced fertilizer use.

Farmers in India tend to overuse urea, which is heavily subsidized in comparison to other fertilizers. While annual domestic consumption of urea is over 30 million tonnes (mt)—about a quarter of it is imported—use of DAP and MOP is around 10 mt and 2.5 mt, respectively.

On an average, farmers apply double the amount of urea as compared to prescribed norms, and in some states like Punjab, Haryana and Rajasthan, 10-15 times more than the requirement. The result is a declining response of crops to fertilizer use—the amount of food grain produced per kg of fertilizer applied declined from around 13kg in the 1970s to less than 4kg by 2010, according to data from the fertilizer ministry.

The Union budget in February marginally reduced fertilizer subsidies from Rs.72, 438 crore in 2015-16 (revised estimate) to Rs.70, 000 crore in 2016-17.

 

Conclusion:

Fertiliser subsidies are very costly, accounting for about 0.8 per cent of GDP (including arrears). They encourage urea overuse, which damages the soil, undermining rural incomes, agricultural productivity, and thereby economic growth.  The current subsidy design—uncapped, varying by end use, and larger for more inefficient producers—incentivises diversion, creates a black market that hurts farmers most and does not encourage producers to operate efficiently. Reform of the fertiliser sector would not only help farmers and improve efficiency in the sector.  It would also show that India is prepared to address exit constraints that bedevil reform in other sectors.  Decanalising imports will ensure timely availability of fertilisers, and universal Direct Benefit Transfer (DBT) to farmers based on biometric identification with physical off-take can reduce diversion of urea.  Given the sensitivity of urea, the DBT could be started for DAP and MOP to create confidence that DBT is workable in fertiliser.

Finally, to secure long term fertiliser supplies from locations where energy prices are cheap, it might be worth encouraging Indian firms to locate plants in countries such as Iran following the example of the Fertiliser Ministry’s joint venture in Oman, which allowed India to import fertiliser at prices almost 50 per cent cheaper than the world price.

 

Source:

Ministry of chemical and fertilizers

Economic survey

Live mint

Environment.cpo.za

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