With deficient rains, the nutrient-based fertiliser subsidy regime makes sense Following up on the proposal made JT in the budget, the finance ministry has kick-sfarted the transition to a 'nutrient-based' fertiliser subsidy regime. This would be followed by the implementation of a mechanism of a direct subsidy transfer regime to farmers instead of routing the subsidy through the industry. Even though no time frame has been set for it, there is a sense of urgency in the exercise this time. The question that the industry, however, is asking is: how soon? The 2008-09 budget, piloted by P. Chidambaram, had a proposal for a pilot project to introduce smart cards for farmers using fertilisers to enable direct payment of subsidy to them. However, the Centre failed to introduce any such scheme. The existing 'product-based' subsidy regime covers 19 fertilisers, whose maximum retail prices (mrp) are fixed by the Centre. For selling at these controlled rates, manufacturers/importers are eligible to a subsidy that compensates them for their higher production/import costs (inclusive of a normative return on investment). In the 'nutrient-based' system, the subsidy is to be linked not to specific fertiliser products, but to the underlying nutrient composition. Representatives of the fertiliser industry, with whom finance secretary Ashok Chawla recently held discussions, have welcomed the idea. The fertiliser industry is facing serious challenges currently due to falling global prices. The new regime will enable the government to know the nutrient value of each fertiliser and enable it to formulate a sharper agricultural strategy. It will also boost investments in the industry. Companies are expected to broaden their production portfolio and offer customised 'value proposition' products to the farmers for different crops and soil-moisture environments. This would, in some measure, throw up solutions to deal with the situations like the current rainfall deficiency. Indirectly, it would contribute to the upa's strategy of protecting its rural vote banks. Under the new regime, it would theoretically be feasible to sell products with defined nitrogen content not just in the form of urea, but also as calcium ammonium nitrate, ammonium sulphate and any similar non-notified or far less subsidised fertiliser. Ammonium sulphate, for example, has less nitrogen relative to urea (20.6 per cent vs 46 per cent), but unlike the latter, also contains 23 per cent sulphur. However, as its mrp is 2.14 times that of urea, farmers have no incentive to buy it. While a 'nutrient-based' subsidy regime is expected to take care of these anomalies, the proposal apparently under consideration now does not, however, take it to its logical conclusion. To start with, what the government is examining is the decontrol of all the existing mrp-covered fertilisers - barring urea, diammonium phosphate (dap) and muriate of potash (MoP). While these would remain under the product-subsidy regime, the balance 16 may be covered by the new nutrient-based mechanism. The subsidy on each nutrient will be benchmarked to the import parity price (ipp) of urea, dap and MoP. At the prevailing landed price of $260 a tonne for urea, the benchmark price of nitrogen comes to roughly Rs273 a unit (basis point). The corresponding unit sale rate for nitrogen -against an mrp of Rs4,830 a tonne of urea - is Rs 105, which translates into a subsidy of Rsl68. Likewise, at current/tonne landed prices of $350 for dap (containing 46 per cent phosphorous) and $460 for MoP (60 per cent potassium) and their corresponding mrps of Rs9,350 and Rs4,455 a tonne, the unit subsidy on phosphorous and potassium works out to Rsl65 and Rs297, respectively. The above ipp-benchmarked subsidy rates for individual nutrients will be made applicable on all the 19 mrp -notified fertilisers. The only difference is that the Centre would continue to fix the mrps in the case of urea, dap and MoP, whereas manufacturers can freely set prices in the remaining and claim a fixed subsidy against each nutrient. The ipps used for benchmarking will be treated as constant, unless global prices fluctuate by 10 per cent or more either way. The Centre would simultaneously effect graded increases in the mrps of urea, dap and MoP, which will redress the excessive bias towards nitrogen usage and also bring down the overall/unit nutrient subsidy. Only when this system stabilises can the nutrient-based subsidy be extended to every other conceivable fertiliser product. And once that happens, along with total decontrol of fertiliser prices, the government would turn to the final stage of delivering the subsidy directly to the farmer, instead of routing it through the industry. The path may be long-winded, but experts have welcomed the announcement. "Today, the fertiliser subsidy incentivises large farmers, who use more fertilisers because subsidy is given to manufacturers. Direct transfer to small and medium farmers is a better idea," says Biraj Pathak, principal advisor to the Supreme Court commissioners appointed to monitor issues relating to the Right to Food.