UREA UNDER NBS REGIME
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Context: The Commission for Agricultural Costs and Prices (CACP) has recently suggested that urea should be brought under the nutrient-based subsidy (NBS) scheme, which was introduced in 2010 for non-urea fertilisers. The NBS scheme links subsidy to the nutrient content of fertilisers, rather than the product.
- The CACP believes that this would help address the problem of imbalanced use of nutrients, which has adversely affected soil health and crop productivity. The CACP noted that fertiliser subsidy has been rising over the years, while fertiliser response and efficiency have been declining.
- The government, however, has not accepted the CACP's recommendation so far. In December 2022, the government informed Parliament that there was no proposal to shift urea to NBS.
- Urea is the most widely used fertiliser in India, but it is also highly subsidised and regulated by the government. The government fixes the maximum retail price (MRP) of urea and pays subsidies to manufacturers to cover the difference between the cost of production and MRP. This has led to the overuse of urea by farmers, resulting in the disproportionate use of nitrogen compared to other nutrients like phosphorus and potassium.
● The Commission for Agricultural Costs and Prices (CACP) is a statutory body under the Ministry of Agriculture and Farmers Welfare that advises the government on the Minimum Support Prices (MSPs) of various crops.
● The CACP considers various factors such as cost of production, demand and supply, price trends, and inter-crop price parity while recommending MSPs. The CACP aims to ensure a fair and stable price environment for farmers and consumers.
The government of India provides subsidies to fertiliser manufacturers and importers to keep the prices of fertilisers affordable for farmers. However, this policy has led to several problems, such as:
Imbalanced use of fertilisers
- Urea, which contains nitrogen, is the only fertiliser whose price is directly controlled by the government. The MRPs of other fertilisers, such as DAP and NPK, which contain phosphorus and potassium, are determined by market forces.
- The government pays a fixed subsidy per tonne of these fertilisers based on their nutrient content. As a result, urea is much cheaper than other fertilisers, which encourages farmers to use more urea than required and less of other nutrients, leading to soil degradation and lower crop productivity.
- The fertiliser subsidy bill has increased significantly over the years due to rising global prices of raw materials, such as natural gas and coal, and lower domestic production of fertilisers.
- In 2021-22, the government spent more than 1.55 trillion rupees on fertiliser subsidies, which is almost double the amount budgeted for the fiscal year. This puts pressure on the fiscal deficit and reduces the scope for public investment in other sectors, such as agricultural research and infrastructure.
Leakage and diversion
- The subsidised fertilisers are often diverted to non-agricultural uses, such as industrial production and exports, or sold in black markets at higher prices. This reduces the availability of fertilisers for genuine farmers and increases their dependence on private dealers.
- Some farmers use subsidised fertilisers for crops that do not need them, such as sugarcane and rice, which leads to environmental pollution and water scarcity.
To address these issues, the government needs to reform the fertiliser subsidy policy by:
Moving towards direct benefit transfer (DBT)
- Instead of paying subsidies to fertiliser companies, the government should transfer the subsidy amount directly to the bank accounts of farmers based on their landholding and crop pattern. This would reduce leakage and diversion, ensure timely delivery of subsidies, and empower farmers to choose the right mix of fertilisers for their crops.
Rationalising urea pricing
- The government should gradually increase the MRP of urea to bring it closer to its actual cost of production or import. This would discourage excessive use of urea and promote balanced use of nutrients. The government should also link the subsidy on urea to its nutrient content, as done for other fertilisers.
Capping subsidised fertiliser consumption
- The government should limit the number of subsidised bags of fertilisers that a farmer can buy in a year, similar to the policy for subsidised LPG cylinders. This would curb the wasteful use of fertilisers and save public resources for other purposes.
What is the Nutrient Based Subsidy (NBS) scheme?
- The NBS scheme was introduced in 2010 by the government to promote the balanced use of fertilizers and reduce the subsidy burden. Under this scheme, the government provides a fixed amount of subsidy per unit of nutrient content to the manufacturers, importers and marketers of fertilizers, who are free to fix the maximum retail price (MRP) of their products.
- The subsidy rates are revised annually based on the international and domestic prices of fertilizers and exchange rates.
- The NBS scheme aims to encourage farmers to use fertilizers according to the soil health and crop requirement, rather than depending on the availability and affordability of a particular fertilizer. It also aims to promote the use of secondary and micronutrients, which are essential for improving soil fertility and crop productivity.
Why is urea excluded from the NBS scheme?
- Urea is the only controlled fertilizer in India, which means that its production, distribution and pricing are regulated by the government. The government fixes a uniform sale price (USP) for urea, which is much lower than its cost of production.
- The difference between the USP and the cost of production is paid as a subsidy to the urea manufacturers. The subsidy on urea accounts for more than half of the total fertilizer subsidy in India.
- The low price of urea has made it attractive for farmers, who tend to overuse it at the cost of other fertilizers. This has resulted in an imbalanced fertilizer use ratio (FUR) of nitrogen (N), phosphorus (P) and potassium (K), which is estimated to be around 27:8:1 in India, as compared to the ideal ratio of 4:2:1.
- The imbalanced FUR has adversely affected soil health, crop quality and yield, as well as the environment.
The CACP has recommended that bringing urea under the NBS regime would have several benefits for farmers, the government and the environment. Some of them are:
- It would promote the balanced use of fertilisers and improve soil health, crop productivity and quality. For example, a study by Indian Agricultural Research Institute (IARI) found that balanced use of NPK increased wheat yield by 25% compared to imbalanced use.
- It would reduce the cost of cultivation for farmers by saving on input costs and increasing output returns. For example, a study by the National Institute of Agricultural Economics and Policy Research (NIAP) estimated that balanced use of NPK could save Rs 1,200 per hectare for rice farmers.
- It would reduce the subsidy burden on the government by rationalising the fertiliser pricing and subsidy mechanism. For example, a study by the National Council of Applied Economic Research (NCAER) projected that bringing urea under NBS could save Rs 25,000 crore per year for the government.
- It would encourage innovation and efficiency in the fertiliser industry by creating a level playing field for all fertiliser manufacturers. For example, a study by the Fertiliser Association of India (FAI) suggested that bringing urea under NBS could spur investment in new capacity and technology upgradation in the sector.
- It would ensure the timely availability of fertilisers to farmers by reducing supply-demand gaps and eliminating black marketing and hoarding. For example, a study by International Food Policy Research Institute (IFPRI) showed that bringing urea under NBS could improve fertiliser distribution efficiency by 15%.
- It would reduce greenhouse gas emissions from agriculture by lowering nitrous oxide emissions from excessive urea use. For example, a study by the Indian Institute of Technology (IIT) Delhi estimated that bringing urea under NBS could reduce nitrous oxide emissions by 8.5 million tonnes of CO2 equivalent per year
However, bringing urea under the NBS regime also poses some challenges that need to be addressed carefully. Some of them are:
- It would require political will and consensus among various stakeholders, especially farmers who may resist any increase in urea prices. For example, a survey by the Centre for the Study of Developing Societies (CSDS) found that 62% of farmers opposed any hike in urea prices.
- It would require effective communication and awareness campaigns to educate farmers about the benefits of balanced fertilisation and persuade them to adopt best practices. For example, a study by National Centre for Agricultural Economics and Policy Research (NCAP) suggested that extension services and mass media could play a key role in disseminating information and influencing farmers' behaviour.
- It would require adequate infrastructure and logistics to ensure smooth distribution and delivery of fertilisers to farmers across the country. For example, a study by the Indian Institute of Management (IIM) Ahmedabad highlighted the need for improving storage, transportation and quality control facilities for fertilisers.
- It would require proper monitoring and evaluation mechanisms to ensure transparency and accountability in the implementation of the NBS regime. For example, a study by the National Institute of Public Finance and Policy (NIPFP) recommended that an independent regulator should be set up to oversee the fertiliser sector.
The CACP's recommendation to bring urea under the NBS regime is a step in the right direction to address the long-standing issue of the imbalanced use of fertilisers in India. However, it needs to be complemented by other measures such as:
- Strengthening soil testing facilities and providing soil health cards to farmers to enable them to apply fertilisers as per the soil requirement.
- Promoting organic farming and integrated nutrient management to reduce dependence on chemical fertilisers and enhance soil fertility.
- Expanding the scope of the NBS regime to include micronutrients and biofertilisers, which are essential for improving crop nutrition and quality.
- Implementing the direct benefit transfer (DBT) scheme for fertiliser subsidy would ensure that the subsidy reaches the intended beneficiaries and eliminates leakages and inefficiencies.
- Urea is a vital input for agriculture, but its imbalanced use has caused serious problems for farmers, the government and the environment. Bringing urea under the NBS regime would help in rationalising the fertiliser pricing and subsidy system, promoting balanced use of fertilisers, improving soil health and crop productivity, reducing subsidy burden and greenhouse gas emissions, and enhancing food security and farmers' welfare.
Must Read Articles:
Nutrient-based subsidy (NBS) Scheme: https://www.iasgyan.in/daily-current-affairs/nutrient-based-subsidy-nbs
Fertiliser Subsidy: https://www.iasgyan.in/daily-current-affairs/fertiliser-subsidy-47
Q. Fertilizer subsidy is a policy tool that aims to support farmers and increase agricultural productivity. However, it also has negative impacts on the environment and the public budget. How can we regulate fertilizer subsidies to balance the trade-offs between environmental protection and financial stability? What are the main benefits and challenges of such regulation? And what are the possible ways forward to implement it effectively and efficiently