The move comes in the context of this revenue item appearing to be heavy and sticky, while fuel subsidies have fallen sharply following the deregulation of retail petrol and diesel prices.
After years of hesitation, the Center has once again begun work on a roadmap to introduce a direct benefit transfer (DBT) system to stem the rising fertilizer subsidy bill. The move comes in the context of this revenue item appearing to be heavy and sticky, while fuel subsidies have fallen sharply following the deregulation of retail petrol and diesel prices.
With the war in Ukraine putting further pressure on global commodity prices, rating agency Icra recently estimated that the Center’s fertilizer subsidy in FY23 is 50% higher than its budget estimate at Rs 1.5 lakh crore. The Center’s bill for fertilizer subsidies has risen sharply in recent years.
According to sources, the government is considering several ways to cut spending on fertilizer subsidies through improved targeting. One option is to have all 14.6 crore farmers buy the soil nutrients at market rates and later transfer the subsidy to their Aadhar-linked bank accounts. The subsidy amount would be determined per hectare, without any restrictions on land ownership.
Another option is to make subsidized manure available to the farmer or to deposit the subsidy in cash into his bank account, subject to a land ownership limit. If the land ownership is above the limit, the farmer will be denied the subsidy for the land he owns above the eligibility threshold.
Subsidy component was established for P&K fertilizers as of April 2010 and this has resulted in subsidies on these fertilizers dropping from Rs 41,500 crore in FY11 to Rs 26,369 crore in FY20. However, sales prices of urea, the most widely used fertilizer, are still being controlled. While the production cost of gas-based urea is about Rs 900/45 kg bag, the farmers get it for Rs 242, with a discount of more than 70%. The spike in global natural gas prices threatens to push up subsidy spending on urea.
Even the subsidy on P&K fertilizers has skyrocketed again to Rs 37,372 crore in FY21 and to Rs 64,192 crore in FY22 as the government failed to pass on the sharp rise in the cost of these fertilizers, which are mostly imported.
Currently, the government periodically releases subsidy amounts to fertilizer manufacturers based on Aadhaar-authenticated sales through point-of-sale machines (PoS), which was rolled out from April 1, 2018 as a precursor to the roll-out of the DBT mechanism. The PoS system helped the Center save 10,000 crore in fertilizer subsidies by plugging leaks in FY19.