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SPECIAL ARTICLE
march 20, 2010 vol xlv no 12
EPW
 
Economic & Political
Weekly
68
Fertiliser Subsidy in India: Who Are theBeneficiaries?
 Vijay Paul Sharma, Hrima Thake
 Vijay Paul Sharma (
 vijays@iimahd.ernet.in
) and Hrima Thaker(
hrimat@iimahd.ernet.in
) are at the Indian Institute o Management, Ahmedabad.
There is a general view in academic and policy circlesthat fertiliser subsidies are concentrated geographicallyon a relatively small number of crops and producers. Inmany cases they do not reach the targeted group(s). Thispaper examines the trends in fertiliser subsidy and issuesof equity in its distribution between farmers and theindustry, across regions/states, crops and different farmsizes. The study shows that fertiliser subsidy is moreconcentrated in a few states and interstate disparity in itsdistribution is still high though it has declined over theyears. A fair degree of equity exists in the distribution of fertiliser subsidy among farm sizes. Based on the results,this paper justifies fertiliser subsidies and questions therationale for a direct transfer of subsidy to farmers.
G
overnments in both developed and developing countriesintervene in agriculture with a view to achieving a widerange o economic and social objectives. The reasons orgovernment intervention are diverse and varied. Some o the ot-cited reasons or intervention are sel-suciency, employmentcreation, support to small-scale producers or adopting moderntechnologies and inputs, reduction o price instability and im-provement o the income o arm households.This interventioncan take a number o orms such as import-export policies anddomestic policies like price support programmes, direct pay-ments, and input subsidies toinfuence the cost and availability o arm inputs like credit, ertilisers, seeds, irrigation water, etc.O all the domestic support instruments in agriculture, inputsubsidies and product price support are the most common. Various benets are cited in justiying input subsidies: economic,environmental and social (World Bank 2008). Input subsidiescan bring economic benets to society but can also be a majorcause o negative environmental externalities when they pro-mote excessive use o ertilisers, agrochemicals and irrigation water. Inputs like ertilisers, irrigation water and electricity havea signicant share in agricultural subsidies in India and ertilisersubsidy has attracted much attention o policymakers, research-ers, and politicians in the recent past. One o the most conten-tious issues surrounding ertiliser subsidies in India is how mucho what is paid out actually nds its way into the pocket o thearmer, and how much is siphoned away by the ertiliser compa-nies. There has also been a debate about the issue o real bene-ciaries o these subsidies (small vs large armers, well-developed vs less developed regions, etc).This paper ocuses primarily on two issues. One, whether erti-liser subsidy is going to the armers or to the industry and two, isthere equity in the distribution o ertiliser subsidy across regions,crops, and dierent arm sizes. Section 1 o this paper describesthe trends in ertiliser subsidies in India while Section 2 deals with the issue o beneciaries o ertiliser subsidy and interstate,inter-crop and inter-arm size disparity in ertiliser subsidy. Thenal section sums up the ndings o the paper and raises somepolicy issues.
1 Trends in Fertiliser Subsidies
Both the intensity o ertiliser usage in terms o nutrients per hec-tare area and the extent o ertilisation as measured by the ratioo ertilised area to total cropped area in many developing coun-tries including India are lower than that in developed countries.However, ertiliser use has been and will continue to be a major
 
SPECIAL ARTICLE
Economic & Political
Weekly
 
EPW
march 20, 2010 vol xlv no 12
69
actor in the increasing agricultural production and productivity.Typically, very ew countries, even advanced ones, have reliedentirely on the ree market system to set ertiliser prices. It is,thereore, not surprising that governments in developing coun-tries are promoting use o ertilisers through various policy in-struments including subsidies. The ertiliser prices at both pro-ducer and armer levels are determined directly or indirectly by the government in most o the countries and such governmentinterventions generally have two basic objectives: (i) to provideertilisers to the armers at stable and aordable prices in orderto increase agricultural production through higher ertiliser use,and (ii) to encourage domestic production by allowing ertiliserproducers a reasonable return on their investments.The Indian ertiliser industry has come a long way since itsearly days o post-independence era. India today is one o thelargest producers and consumers o ertilisers in the world.India’s production in terms o nitrogen and phosphorus nutrientsreached a level o 15,960 thousand tonnes in 2006-07 rom 38.7thousand tonnes in 1951-52. Similarly, consumption o ertilisersin terms o nutrients (nitrogen, phosphorus, potassium (
NPK
))has also grown rom 65.6 thousand tonnes in 1951-52 to nearly 22,570 thousand tonnes in 2007-08 (Figure 1).The Indian ertiliser industry, given its strategic importance inachieving sel-suciency o oodgrains production in the coun-try, has or decades, been under government control.With theobjective o providing ertilisers to armers at an aordable priceand ensuring adequate returns on investments to entrepreneurs,a ertiliser policy o providing ertilisers to armers at subsidisedprices was envisaged to induce armers to use ertilisers. In orderto achieve this objective, government introduced the RetentionPrice cum Subsidy (
RPS
) scheme, a cost-plus approach, ornitrogenous ertilisers in November 1977 and extended this tocomplex ertilisers in February 1979. Under the
RPS
the retailprice o ertilisers was xed and was uniorm throughout thecountry. The dierence between the retention price (adjusted orreight and dealer’s margin) and the price at which the ertilisers were sold to the armer was paid back to the manuacturer assubsidy.The
RPS
did achieve its objective o developing a largedomestic industry, achieving near sel-suciency in ertiliserproduction and increasing consumption o chemical ertilisersbut it was not ree rom criticism o ostering ineciency leadingto a huge burden o subsidies.
Towards Reform of the Price Policy
The mounting burden o subsidies compelled the policy plannersto make a serious attempt to reorm the ertiliser price policy torationalise the ertiliser subsidy. As part o economic reorms ini-tiated in early 1990s, the government decontrolled the import o complex ertilisers such as di-ammonium phosphate (
DAP
) andmuriate o potash (
MOP
) in 1992, and extended a fat-rate conces-sion on these ertilisers. But, urea imports continue to be re-stricted and canalised.Based on the recommendations o various committees includ-ing the High Powered Fertiliser Pricing Policy Review Committee(
HPC
) and the Expenditure Reorms Commission (
ERC
), a NewPricing Scheme (
NPS
) or urea units was implemented in a phasedmanner rom April 2003 with an objective to bring transparency,uniormity, and eciency, and reduce the cost o production.Similarly, based on the recommendations o the Expert Group on
P
and
K
ertilisers, a policy or phosphatic and potassic ertilisershas been implemented.The main objective o all policy interventions has been to con-tain and target ertiliser subsidies. However, estimates o erti-liser subsidy as per the central government budgets over the yearsin the post-reorms era show that ertiliser subsidy has increased
--------
Figure 1: Trends in Fertiliser Production and Consumption in India
(1951-52 to 2007-08)(‘000 tonnes)
24000180001200060000
1951-52 1959-60 1967-68 1975-76 1983-84 1991-92 1999-2000 2007-08
ConsumptionProductionSource: FAI (2008).
Table 1: Major Subsidies in India: 1990-91 to 2008-09
(Rs crore)
FertilisersYear Food Indigenous Urea Imported Urea Decontrolled Fertilisers Total Total Subsidies
1990-91 2,450 3,730 659 4,389 12,1581991-92 2,850 3,500 1,300 – 5,185* 12,2531992-93 2,800 4,800 996 5,796 11,9951993-94 5,537 3,800 762 4,562 11,6051994-95 5,100 4,075 1,166 528 5,769 11,8541995-96 5,377 4,300 1,935 500 6,735 12,6661996-97 6,066 4,743 1,163 1,672 7,578 15,4991997-98 7,900 6,600 722 2,596 9,918 18,5401998-99 9,100 7,473 333 3,790 11,596 23,5931999-00 9,434 8,670 74 4,500 13,244 24,4872000-01 12,060 9,480 1 4,319 13,800 26,8382001-02 17,499 8,044 47 4,504 12,595 31,2102002-03 24,176 7,790 3,225 11,015 43,5332003-04 25,181 8,521 3,326 11,847 44,3232004-05 25,798 10,243 494 5,142 15,879 45,9572005-06 23,077 10,653 1,211 6,596 18,460 47,5222006-07 24,014 12,650 3,274 10,298 26,222 57,1252007-08 31,328 12,950 6,606 12,934 32,490 70,9262008-09 (RE) 43,627 16,517 10,981 48,351 75,849 1,29,243
*Includes Rs 385 crore fertiliser subsidy given to small and marginal farmers.Source: Government of India (2009).
Figure 2: Trends in Food and Fertiliser Subsidies in India
(as % of GDP at current prices, 1990-91 to 2008-09)
-------
1.61.20.80.41990-91 1993-94 1996-97 1999-2000 2002-03 2005-06 2008-09
Food subsidyFertiliser subsidySource: Government of India (2009 and 2009a).
 
SPECIAL ARTICLE
march 20, 2010 vol xlv no 12
EPW
 
Economic & Political
Weekly
70
signicantly. Table 1 (p 69) presents the estimates o major subsi-dies including ood and ertiliser subsidies in the post-reorms pe-riod (1991-92 to 2008-09). It is evident rom the table that totalsubsidies have increased rom Rs 12,158 crore in 1990-91 toRs 1,29,243 crore in 2008-09, an increase by 10.6 times. The erti-liser subsidy has increased rom Rs 4,389 crore in 1990-91 toRs 75,849 crore in 2008-09 representing an increase o over 17times. As a percentage o the gross domestic product (
GDP
), thisrepresents an increase rom 0.85% in 1990-91 to 1.52% in 2008-09(Figure 2, p 69). The ertiliser subsidy in India as a percentage o the
GDP
varied rom 0.47 in 2002-03 to 1.52 in 2008-09. The total oodsubsidy has jumped to Rs 43,627 crore in 2008-09 rom 2,450 crorein 1990-91, about an 18-old increase in less than two decades in ab-solute terms. But measured in terms o percentage o 
GDP
, the bur-den o ood subsidies in India is much less than that o many otherdeveloping countries. The ood subsidy in India as percentage o the
GDP
has varied rom 0.41 in 1992-93 to 1.02 in 2002-03, and on anaverage has remained at 0.66 over the last 19 years.During the 1990s (1990-91 to 2000-01), ertiliser subsidy ac-counted or about 47% o the total subsidies and share o oodsubsidy was 35.1% (Figure 3). In the 2000s (2001-02 to 2008-09),ood subsidy became dominant, accounting or 49.1% o the totalsubsidy while ertiliser subsidy accounted or 39.5%. However,during the last three years, ertiliser subsidy has taken the largestshare and accounted or 58.7% o total subsidies in 2008-09.The above analysis shows that the volume o subsidies in-creased substantially during the post-reorms period (1991-92 to2008-09). The rate o increase, however, was higher or ood sub-sidy (compound annual growth rate o 16.9% per year) than orertiliser (12.9%). The rate o change in the amount o subsidies was uneven over time. Total subsidies and ertiliser subsidy in-creased at a much aster rate during the 2000s while growth ratein ood subsidies was higher (16.9%) during the 1990s compared with the 2000s (9.3%). During the 2000s, ertiliser subsidy growth has increased signicantly (27.7%) as against 12.9% dur-ing the 1990s, because international prices o ertilisers, rawmaterials, eedstock and intermediates increased substantially (and yet ertiliser arm gate prices remained constant in thecountry) since 2002 in general but more so during the last two tothree years.
Who Benefits from the Fertiliser Subsidy?
There is a debate about whether the ertiliser subsidy benets thearmers or the ertiliser industry (Gulati 1990; Gulati and Naray-anan 2003). Furthermore, the benets o ertiliser subsidy areheavily tilted towards the large armers growing water-intensivecrops like rice, sugar cane, wheat and cotton in a handul o states. As per the estimates by Gulati and Narayanan (2003), theshare o armers in the ertiliser subsidy increased rom 24.54%in the triennium average ending (
TE
) 1983-84 to 75.62% in
TE
 1995-96 with an average share o 67.5% or the period 1981-82 to2000-01 and the rest went to the ertiliser industry. These esti-mates have been computed by comparing subsidy estimatesthrough import parity price (
IPP
) and arm gate prices o ertilis-ers with the amount o subsidy given in the central governmentbudget. Some o the recent policy announcements like the inten-tion o the government to move to a system o direct transer o subsidy to the armer are based on such ndings which are basedon unrealistic assumptions. For example, the study assumes thatIndia’s entry into the world ertiliser market as an importer wouldnot aect world prices and that world ertiliser markets are per-ectly competitive. However, both the assumptions are not validand we discuss these assumptions in greater detail with empiri-cal data in the ollowing section.
World Fertiliser Market
First, when studying prices and price determination in any industry, one usually looks to a body o economic theory called
Table 2: Concentration of World Fertiliser Production, Consumption and Trade
(2007-08)
Product/ Nutrients Countries % Share of Top10 in World
Consumption
N China (34.8%), India (15.5%), US (12.4%), Pakistan (2.8%),Indonesia (2.8%) 78.9P China (31.5%), India (15.8%), US (11.3%), Brazil (9.7%)Pakistan (2.7%) 80.3K China (24.0%), US (17.3%), Brazil (15.2%) India (9.8%),Malaysia (3.9%) 81.3N+P+K China (32.2%), India (14.6%), US (13.0%), Brazil (6.5%),Indonesia (2.5%) 78.1
Capacity 
N China (26.9%), India (8.8%), Russia (7.7%), US (6.0%),Indonesia(3.6%) 66.6P US (21.0%), China (18.5%), Morocco (8.4%), Russia (7.4%),India(5.5%) 73.8K Canada (39.6%), Russia (12.7%), Belarus (11.1%),Germany (8.7%), US (5.6%) 95.0N+P+K China (24.3%), Canada (10.4%), Russia (9.7%), US (9.5%),India (7.6%) 75.9
Exports
Urea China (16.1%), Russia (12.7%), Saudi Arabia (9.4%),Ukraine (9.3%), Qatar (7.7%) 77.0Ammonia Trinidad (25.2%), Russia (18.7%), Ukraine (7.6%),Indonesia (7.3%), Canada (5.1%) 81.1MAP and US (33.8%), China (21.1%), Russia (19.2%), Morocco (9.0%),DAP Tunisia (5.3%) 98.8Potash Canada (38.6%), Belarus & Russia (36.3%), Germany (11.2%),Israel (7.6%), Jordan (3.7%) 100.0
Imports
Urea India (18.0%), US (17.5%), Brazil (6.1%), Thailand (4.9%),Turkey (4.4%) 64.8Ammonia US (40.5%), India (9.2%), Korea Republic (5.7%),France (4.3%), China (3.9%) 77.4MAP and India (15.5%), Brazil (15.1%), Pakistan (7.6%), ArgentinaDAP (6.6%), Canada (4.5%) 66.4Potash China (15.1%), US (12.7%), Brazil (11.5%), India (6.4%),Malaysia (2.9%) 57.7
Source: Agrium (2009).
-------
Figure 3: Trends in Food and Fertiliser Subsidies in India
(as % of total subsidies, 1990-91 to 2008-09)
1990-91 1993-94 1996-97 1999-2000 2002-03 2005-06 2008-09605040302010
Fertiliser subsidyFood subsidySources: Government of India (2009).

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