As green revolution increased the factor cost/input cost of agriculture and necessitated the use of chemical fertilisers, in order to support the farmers, we came up with fertiliser subsidy.
The fertiliser subsidy in India works based on Administered Price Mechanism(APM) for fertilisers. The government decides the price at which the fertilisers should be sold in the market under APM. But this will demotivate the producers of fertilisers as they may not get sufficient profits as they have to sell their product at price decided by the government. So government introduces Retention Prising Scheme(RPS) to support the producers. Under RPS, the government pays an amount to the producers to retain them in this business, which is different for each producer. The amount paid by the government is the difference between Retention Price and Administered Price. Currently, RPS is only for Urea and government support Urea producers by repaying 12% of the net worth of the company if it meets minimum efficiency norms.
Net worth (sometimes called net or wealth) is the total assets minus total outside liabilities of an individual or a company. Net worth is used when talking about the value of a company or in personal finance for an individual’s net economic position. Put another way, net worth is any asset owned minus any debt owed.
As the subsidy is given on the net worth of the producing unit, if the unit is more efficient in production, it may be able to make a smaller loss in the market under APS and get more profit from RPS. So, big manufacturers with larger capital and better technology have a chance to make a bigger profit by syphoning the government money while fewer benefits are passed on to the farmers. Since it rewards high capacity utilisation and penalises low capacity utilisation, units would have reason to deliberately understate capacity in order to make their utilisation achievements sound higher.
Government studied this issue and currently there is a suggestion to change the basis of RPS from individual manufacturing unit to pool of manufacturers using same raw material and process. All domestic fertiliser units are to be broken up into six groups based on the feedstock they use and how old they are. The six groups are pre-’92 gas-based, post-’92 gas-based, pre-’92 naphtha-based, post-’92 naphtha/furnace oil-based, LSHS-based and mixed fuel-based. Average retention prices of each of these groups will be determined and that will become the price offered to all units in a group.
There is also a suggestion to decontrol the prices by allowing partial open market sales at a fixed ceiling price and gradually decontrol the prices of Urea.
The Phosphatic and Potassic fertilisers are under a decontrolled regime as of now and are sold at indicative maximum retail prices (MRPs). The government also provides a subsidy on some decontrolled fertilisers. In the case of phosphatic fertilisers like di-ammonium phosphate, the subsidy is available only on domestic production, whereas in the case of potassic fertilisers like muriate of potash it is extended even to import because there is no domestic production.To foster the balance use of fertilizers; government implimented Nutrient Based Subsidy (NBS) policy from 2010 for fertilizers other than Urea. The fertilizers included in this scheme include 22 grades of decontrolled fertilizers 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.
We also saw that the green revolution increased the production of foodgrains in India. The increased production lead to more supply of food grains and hence pushed the demand supply equilibrium towards the low demand-low price side. Already green revolution lead to increase cost of inputs in agriculture. The increased factor cost along with decreased selling price pressurised farmers and was capable of causing loss to the farmers. To prevent this government came up with Minimum Support Price system in agricultural products. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
Minimum support price is the price declared by the government as an insurance to the producer. In case of bumper crops and sudden fall in prices due to increased supply, government agencies would buy the products at the declared MSP.
Earlier governement also used to decalre a separate procurement price for purchasing the Food grains for PDS. If prices were normal(not a bumper crop and market prices not too low) procurement price was lower than the open market price and higher than the MSP. This was discontinued later.
While this Administered Price Mechanism was designed as a support to farmer, the continued MSP policy due to political reasons has caused issues in the market.
Higher MSP for Food grains was a contributing factor for increased production of wheat and rice, compromising on pulses and vegetables, which lead to intercrop disparity. Similarly uncontrolled procurement from market lead to huge buffer stocks with government beyond the storage capacity of Food Corporation of India. This has lead to improper storage, damage and wastage.
Initially, MSP was higher than market price only when there was bumper crops and sudden fall in prices. But due to political nature of demands MSPs were raised many times, and MSPs gradually grew bigger than market price. This manipulates the demand supply equilibrium and creates artificial demands in the market and leads to price fluctuations in the market also. Currently, MSPs are supposed to be dictating market prices and causing uncontrolled food inflation in Indian Economy.
MSP policy insulates the farmers from risks of the market and competetion. Though it is good in short term, it discourages the farmer from introducing better farming practices and improving the productivity in the long run. This is also a reason why Indian agriculture failed to develop beyond green revolution.
We need to rationalise MSP to overcome this problems. MSPs should be slowly withdrawn or kept at a fair price in such a way that it can be invoked only when there is a distress year. In normal situation market should be allowed to operate by the forces of demand and supply.