DECEMBER 20, 2018

By Naresh Minocha, Consulting Editor

AADHAR-based direct benefit transfer (DBT) has hit avalanche of challenges posed by food and fertilizers subsidies. These dole-outs account for the lion's share of explicit subsidies given by the Union Government.

Though Cash Transfer of Food Subsidy (CTFS) Rules were notified in August 2015, not one State has discontinued physical delivery of subsidized grain through ration shops. Jharkhand aborted its pilot CTFS in Nagri Block of Ranchi district six months after its launch in October 2017.

Cash transfer was strongly opposed by majority of the beneficiaries. A few lakh beneficiaries, however, continue to be served through CTFS in three Union Territories.

CFTS can work only when the delivery of food grains across the country is smooth and timely. The Government also has to ensure that open market prices are fair and competitive, a herculean task in an economy of continental dimensions.

Any price volatility in different regions due to supply glitches or market manipulations would make beneficiaries realize the gross inadequacy of cash transferred. Hence the poor masses continue to prefer subsidy in kind as that ensures access to fixed price of coarse grain, wheat and rice. They have patience to stand in long queues for grain, which is not always of specified quality.

No one knows whether and when CTFS would be rolled out across the country. Prime Minister Narendra Modi who loves to speak about Aadhar-based DBT, remains silent on this issue.

Mr. Modi also maintains stony silence on turning pseudo-DBT for fertilizers into real DBT under which subsidy goes straight in beneficiaries' bank accounts. His silence on long-delayed inclusion of urea under nutrient-based subsidy (NBS) scheme for fertilizers is equally deafening.

At least four official committees have pitched for NBS for all nutrients since 2005. NBS is the key to correcting imbalanced usage of fertilizers and its impact on soil health and crop yields.

NBS was launched in April 2010 for products excluding urea whose price is statutorily controlled with a web of pricing schemes. The manufacture or import of all other fertilizers is price decontrolled. The Government, however, subsidizes such fertilizers by giving subsidy to the suppliers and by asking them to market products at reasonable prices.

Under NBS, the Government notifies subsidies per kg of each nutrient. A decontrolled fertilizer has two or more different nutrients.

Reforms logic requires appropriate sequencing of new initiatives. If UPA or NDA regimes had followed this logic, either of them would have brought urea under NBS before embarking on DBT.

The problem is that both lack political spine to tell the Opposition parties and farmers that this step is required for doubling (if not more) farm income by reversing crops' declining response to fertilizers, restoring soil health and strengthening food security.

To quote the Committee on Optimization of Fertilizer Usage that submitted its report to Cabinet Secretariat during September 2010, "the underlying concept of NBS is equal subsidy for all the same nutrient in any form, either as a straight fertilizer or as a complex/mixture. This needs to be operationalised for all FCO approved fertilizers at the earliest".

More on the balanced usage of fertilizers later in this column.

Fertilizers sector is thus apt instance of botched-up reforms and policy paralysis.

The first lesson of DBT coverage of different Central schemes is that food and fertilizers can't be treated in the same fashion as scholarships or LPG.

A below-poverty-line (BPL) family might or might not use one LPG cylinder a month. It, however, consumes food two or three times a day. It needs guaranteed supply of food at a very low price. The food grain prices have thus been kept unchanged since the enforcement of National Food Security Act 2013. The procurement prices, on other hand, are hiked every crop season. The food subsidy thus keeps galloping every year.

There is no digital app that can facilitate advance deposit of food subsidy in the beneficiary's bank account with transferred cash matching the open market price of food in the beneficiary's village.

The difference between CTFS and purchase price of food grains can get expressed as pangs of hunger. This can trigger mass protests as were seen in Jharkhand's Ranchi district. And protests can reduce the popularity rating of both Central and State Governments. This explains virtual shelving of CTFS.

Turn now to fertilizer DBT. The Department of Fertilizers (DOF) admits: "DBT in Fertilizers is much more complex than DBT in other schemes".

A DOF Presentation dated February 2017 has thus identified six challenges: First, beneficiary is not defined as fertilizers are sold on 'no denial basis'. Second, beneficiary entitlement is not defined. Third, subsidy amount is more than twice the subsidized price. Fourth, moving maximum retail price (MRP) to Market Price will cause huge burden on farmers as they would be required to pay market price upfront. Fifth, amount of subsidy varies from one product to another. Sixth, urea subsidy varies from factory to factory.

DOF also sees certain benefits accruing from DBT. First, it creates Aadhar-seeded database of beneficiaries and provides transaction visibility at the fertilizer buyer's level. Second, DBT facilitates transparent and faster tracking of funds along the value chain right from manufacturers/importers to beneficiaries by linking actual sales to subsidy payments. Third, DBT would facilitate optimal use of nutrients and subsidy savings by linking soil health card data with actual purchase of fertilizer by farmers.

The Government rolled so-called DBT for fertilizers across the country in March 2018, after phased pilot trials beginning October 2016.

The fact is that not a single Paisa has been transferred into bank account of farmers. They continue to get subsidy in kind (as fertilizers).

The actual subsidy is thus paid through fertilizer industry for supplying fertilizers at prices that are well below cost of manufacture or cost of imports.

The existing DBT is thus a misnomer. The only difference between DBT and the earlier system is that now industry is paid subsidy after actual fertilizer sale. That is, after sale is recorded by Point of Sale (POS) machines. These gadgets are installed at 2 lakh fertilizer retail outlets across the country.

Under previous system, the Government gave subsidy to the companies after they delivered indigenous or imported fertilizer in a district. This changeover has increased the working capital burden for companies. This is due to doubling of payment cycle from three to six months.

Pseudo-DBT has brought miseries to all stakeholders- farmer, retailers and fertilizer companies, except the Government. The farmers have to queue up before retail shops as the process of authentication of Aadhar card and recording of transactions takes time. The transaction time has increased as PoS machines are full of glitches. They also suffer from networking problems and power outages and servicing problems.

All this forces the retailers to sell huge quantity of fertilizers without recording them in POS. This problem has been documented well in a study titled' Assessment of AeFDS (Aadhaar enabled Fertilizer Distribution System) Pilot'. The study was conducted by MicroServe in 2017-18 at behest of NITI Aayog.

As put by the Study, "Approximately 10 percent of the total transactions are estimated to be "adjusted transactions" i.e. someone else authenticated using his/her Aadhaar, either during the sale or later for reconciliation, instead of the buyer".

Even in the case of transactions recorded in POS, the mismatch exists between sale and stocks . Reconciliation between sales and supplies for payment of subsidy is thus a problem area.

Pseudo-DBT has created several other problems. The Fertiliser Association of India's (FAI's) annual report for 2017-18 is replete with instances of its multiple efforts with different authorities to sort out persisting problems faced by the companies, farmers and retailers.

The Government's promise of weekly payment subsidy after recording of sales in POS has turned out to be an illusion due to budgetary constraints & accounting woes.

FAI thus considers 2018-19 budget allocation of Rs 70,000 crore for fertilizer subsidy as inadequate. It has estimated an additional Rs 30,000 crore budgetary requirement keeping in view rise in price of gas and imported fertilizers and the need for weekly payments under DBT. The total outstanding subsidy aggregated to Rs 23,495 crore as on 1st November 2018.

FAI says: "The DBT Scheme will become dysfunctional, if enough funds are not available for weekly payment of subsidy bills".

Subsidy arrears, running into thousands of crores of Rupees, for preceding years have been part and parcel of industry for more than two decades. Roll-over of industry's unpaid bills to the next annual Union Budget has become a core element of fiscal jugglery.

The Government would review Pseudo-DBT after March 2019. In the meanwhile, a committee constituted by NITI Aayog is studying the prospects of transferring subsidy directly into bank account of farmers.

The crux of the problem is to first define who should get DBT – the cultivator, share-cropper or the land owner who might be living in city. Second challenge is to specify subsidy allocation on per acre basis. Third challenge is to keep live updates of land records including leasing of land. Fourth challenge is inflation-indexing of fertilizer prices.

The industry wants urea to be under NBS. It also wants direct transfer of cash subsidy in farmers' accounts.

As for imbalanced application of fertilizers, even a layman would realize that the problem lies in quantum of subsidy. It constitutes 70% of cost of urea and 30-40% cost of decontrolled fertilizers. The latter percentage moves with changes in import prices of decontrolled fertilizers and their inputs.

According to FAI, under present subsidy policy, price ratio of Di-ammonium Phosphate (DAP) vis-à-vis urea has increased from the level of 2:1 in 2010 to 5:1 at present. Price ratio of Muriate of Potash (MOP) vis-à-vis urea has also widened from the level of 0.9:1 to 3:1.

This is suppressing consumption of phosphorous and potash (P&K) fertilizers. Current consumption is heavily skewed in favour of urea (which contains only nitrogen N).

The NPK use ratio has widened from the optimum level of 4:2:1 to 6.1:2.5:1 at present. Such imbalance in use of major nutrients along with inadequate application of secondary and micronutrients are resulting in sub-optimal crop productivity.

FAI says: "It may be underlined that our crop productivity is much below the levels of many of our neighbouring countries. Thus, Indian farmers are not getting optimum return from use of fertilizers and other inputs".

The committees that have pitched for prompt correction of imbalanced fertilizer usage include two constituted by the Modi Government: The Committee on Doubling of Farmers' Income (2018) and High Level Committee (HLC) on Reorienting the Role and Restructuring of FCI (2015).

The latter recommended reforms both in food and fertilizer subsidies. It observed: "Urea prices are administered at a very low level compared to prices of DAP and MOP, creating highly imbalanced use of N, P and K".

HLC recommended: "farmers be given direct cash subsidy (of about Rs 7000/ha) and fertilizer sector can then be deregulated. This would help plug diversion of urea to non-agricultural uses as well as to neighbouring countries, and help raise the efficiency of fertilizer use".

Studies conducted by Indian Council for Agricultural Research (ICAR) show that the fertiliser response ratio (kg grain per kg nutrient) decreased nearly four times from 13.4 in 1970 to around 3.2 in 2010 in irrigated areas.

Let this be taken as the ultimate wake-up call for bringing urea under NBS, which should always be product neutral.