Why DBT on fertiliser subsidy could prove more chaotic than corrective

From April this year, the government plans to make it mandatory for the nation’s nearly 140 million farmers to mandatorily receive fertiliser subsidy through the Direct Benefit Transfer (DBT) mode. A less-noticed supplement to this announcement has been a stated intention to eliminate the arrears in subsidy payments to fertiliser companies before DBT comes into force –- that is, by March 31, 2018.

As on December 22, around 14 states have been brought under the DBT framework. This will be music to fertiliser manufacturers, since the question of subsidy arrears has remained a troublesome one for years, impinging on working capital costs. Indeed, the government appears to have signalled its intention already; this financial year (2017-18), arrears could fall to Rs 280 billion (Rs 28,000 crore), from Rs 300 billion (Rs 30,000 crore) in 2016-17. Lower gas prices, to which the subsidy is linked, could have had something to do with this.

But can the nationwide rollout of DBT really see subsidy arrears vanish so quickly? Probably not, say industry representative, and that is because fundamental issues need addressing first.  

For one, the era of low gas prices appears to be ending. After falling steadily in the first half of 2017-18, gas prices rose 10 to 15 per cent in the second half.

The gas prices are due for review in April. A higher gas price means higher cost of production for fertiliser companies as 65 per cent of the raw material expenditure is gas price.

For another, there are doubts over whether the DBT process will actually help reduce the due clearance process. As K Ravichandran, senior vice-president and group head, corporate ratings, ICRA, explained, “Currently, bills are processed once fertiliser bags move from the factory gate to the district headquarters. With DBT, the payment process will start after the bag is actually bought by the end-user.”

Ravichandran is referring to the manner in which DBT will operate for the fertiliser subsidy. Unlike the cooking gas subsidy, which is deposited into consumers’ bank accounts after they pay the full amount upfront, the DBT for fertiliser subsidy operates differently. On the assumption that farmers may not have the wherewithal to pay upfront, he will continue to buy fertiliser at a subsidised rate from point-of-sales (PoS) machines, which will record the transactions. The subsidy will be paid once these transactions details are uploaded on the retailer’s website.  

This means that DBT in its present form adds another level of clearances for the industry. “The systems need to be fine-tuned, otherwise it could lead to chaos,” said a senior industry official.

There are two possible sources of chaos. One is the availability of PoS machines. About 130,000 point of sale (PoS) machines have been deployed with fertiliser retailers in the 14 states in which DBT has gone live. Rolling out the programme in all states will require more than 200,000 machines by March 2018. More than 60 per cent of the requirement for PoS has been met already and only 4-5 states are yet to install it, industry sources say.

Second, the procedure for recording a PoS transaction has been fraught with other glitches linked to the Aadhaar-enabled Fertiliser Distribution System or AeFDS. A pilot study of 200 outlets in 88 districts by Microsave, a government-mandated organisation, found that 88 per cent farmers were unaware of the need to produce an Aadhaar card to buy fertiliser. And only 35 per cent of biometric authentications were successful at the first attempt.

In short, the AeFDS is likely incapable of handling the peak traffic of 300 to 500 farmers per day during the cultivating season. This raises the risk of retailers resorting to fake transactions, meaning someone else would authenticate for the buyer, creating grounds for leakages, the very problem DBT intended to eliminate.

Fertiliser manufacturers say an easier way to reduce the subsidy arrears would be to streamline processes. One example: notifications of freight reimbursement revisions take months, which in turns delays the subsidy claims.

The government is also banking on related measures to reduce fertiliser consumption, principally of urea, the most heavily subsidised, and therefore most heavily used, fertiliser in India. In a recent radio address, Prime Minister Narendra Modi called for halving urea usage by 2022 –– the country consumes about 30 million tonnes of urea.

Given current domestic production of 24 million tonnes a year, this would reduce burgeoning imports –– which currently stand at 5-7 million tonnes –– to nil. To this end, the government has accelerated several initiatives started under the previous regime to accelerate the process.  

In 2015, the government made it mandatory for all manufacturers to coat urea with neem, which optimises urea use by slowing the release of nitrogen, and prevents urea being diverted to other uses (such as milk adulteration). Smaller units packs of 45 kg instead of 50 kg are a part of this plan. These moves, though sound on paper, have turned out to be less than conclusive in practice.  

Neem-coated urea, for instance, has the potential to save around 10 per cent of urea consumption and improve soil health. There are initial studies which show that yields have improved in some states due to neem-coated urea, but there is no conclusive proof of that,” industry players said.

A study by the Bangalore-based Institute for Socio-Economic Change, for examples, shows that although a majority of paddy farmers noted an improvement in soil health and the quality of grain, more than 80 per cent pigeon pea farmers saw no change. For paddy farmers, the value of output role 10 per cent against just 4 per cent for pigeon pea farmers, the report added.

Most significantly, perhaps, the cost of “other” fertilisers shot up 15 per cent for paddy and 50 per cent for pigeon pea when neem-coated urea was used in place of normal urea.

Soil Health Cards (SHC), of which over 100 million have been issued so far, are also expected to encourage farmers to go for judicious use of fertilisers. But, as fertiliser manufacturers point out, these won’t make much different unless the government undertakes an exercise in scientific soil mapping and farmers start acting on the recommendations mentioned in the card.

Indeed, doubts about the combined impact of DBT, use of neem-coated urea, smaller unit packs and SHCs in reducing fertiliser consumption are gathering strength because growing demand for food is expected to boost India’s fertiliser consumption by at least 20 per cent in the next decade.

To boost domestic fertiliser production, much depends on the domestic industry’s ability to expand – it currently produce 24 million tonnes a year – and how fast the government can help revive the eight closed units.

“A big challenge for the industry in the next financial year would be DBT and complying with the new energy norms which could impact their profitability unless government extends the deadline,” said Ravichandran.

The best solution, suggests Rakesh Kapur, chairman of Fertiliser Association of India (FAI), is for the industry to be decontrolled. “We need to move away from the model of continuing to subsidise commodity fertilisers. Farmers should be directly paid lump sum subsidy based on their land holdings and given the freedom to buy fertilisers of their choice, he said. But that would require a radical change of mind-set for which few governments are prepared.