Deregulate pricing: How not to curb urea blackmarketing

In a bid to tackle diversion, hoarding and blackmarketing of urea (a widely used fertiliser that constitutes nearly half of India’s total fertiliser consumption), the Union government has decided to restrict its purchase to 100 bags from 999 bags per transaction by one purchaser.

In a letter dated August 27, addressed to state chief secretaries, the secretary, ministry of chemicals and fertilisers, Chhabilendra Roul, has sought their opinions on ‘how many such transactions should be allowed per month to each purchaser’. He has also asked states ‘to identify top 20 urea purchasers in each of their respective districts’.

States have also been asked to collect details from buyers, which include the quantity of urea purchased, dates of purchase, point of sale such as retailers, agricultural land owned by the buyer, land under cultivation, among others.

One gets flummoxed at the mention of diversion, hoarding and black marketing of urea given the backdrop of a statement by none other than the prime minister Narendra Modi in early 2016; addressing a rally in Tamil Nadu, he had said, “Urea was being sold in the black market and farmers had to bribe officials to get their quota of urea.

My government put an end to the practice of corruption in the sale of urea. We have started distributing neem-coated urea which helped farmers bring down their cost of production as well as the quantity of chemicals used in farm operations”.

If the menace had been eliminated then, how come we are fighting it now? To unravel the mystery, it is important to understand the system of urea supply, distribution and pricing.

To make urea affordable to farmers, the Centre controls its maximum retail price (MRP), pegging it at a low level (which is unrelated to the costs of production and distribution, both being higher). The excess cost over MRP is reimbursed to the manufacturer as subsidy, which varies from unit to unit depending on its cost of production. The cost of transportation from the plant to the retailer is reimbursed under a uniform freight policy.

Launched in 1977 as the Retention Price Scheme (RPS); in 2003, the system was rechristened as New Pricing Scheme (NPS). Since 1973, urea’s movement and distribution are controlled under the Fertilizer (Movement) Control Order, 1973, issued under the Essential Commodities Act (ECA).

The assessment of the requirement of urea (apart from all other fertilisers) for each season is finalised by the Department of Agriculture and Cooperation (DoAC) in consultation with Department of Fertilizers (DoF), states, railways and fertiliser manufacturers. For this, biannual zonal conferences are held before the start of each cropping season, i.e. kharif (April to September) and rabi (October to March). The requirement is broken down month-wise.

To fulfil the requirement, DoF prepares an agreed supply plan (in consultation with manufacturers/importers) to cover all of the urea requirement from domestic production and import. Since 2003, though 50% of the indigenously produced urea was deregulated. DoF continues to draw the supply plan for the entire quantity even as the states allocate all of the urea arrivals and track disbursal up to the district level.

Even as production cost has increased in leaps and bounds, the government has kept MRP frozen. The current MRP is ridiculously low at Rs 5,360 per tonne or $71 per tonne (at current exchange rate). The average production cost from gas-based plants is more than four times, at about $320 per tonne, and the cost of import is about $300 per tonne.

The price in neighbouring countries such as Nepal, Bangladesh, etc, is also high in the $250-300 per tonne range. This scenario is very tempting for industrial users in India and even for farmers in our neighbouring countries.
When industries can access ‘subsidised’ urea at 1/4th the import price, why would they not grab it? Why would dubious traders not divert to them the supplies meant for farmers? And, why would they not smuggle it out of India?

It is this flawed system of administering subsidy, i.e., routing it through the manufacturers and keeping a huge gap between the MRP and the cost by pegging the former at an artificially low level that is at the root of diversion & black marketing of urea.

The way forward is to end control of the MRP of urea, allow manufacturers the freedom to fix retail prices based on the market forces, and remove movement and distribution control. As for helping farmers, the subsidy should be directly credited to their bank account or direct benefit transfer (DBT) as it is known in common parlance. When urea at throwaway price is not available—and thus, there is no arbitrage opportunity—the scope for diversion will end too.

This will also yield a host of other benefits, such as an increase in efficiency and cost reduction across the entire supply chain, innovation by the industry to make better and customised solutions to meet farmers’ diverse needs, increase in efficiency of fertiliser use (all these are germane to letting competition work), and, above all, reduction in the subsidy outgo. Yet, overlooking this fundamental reform, the government is merely harping on administrative measures.

In 2015, it issued an order requiring all manufacturers/importers to do neem-coating of all the urea supplies mandatorily. With this, Modi believed that this would render urea unusable for industrial purpose hence, no diversion. This could work if the coating is done. That is where the rub lies. Someone needs to do policing of a humongous 600 million bags of 50 kg each (corresponding to 30 million tonnes). That is well-nigh impossible.

No wonder, DoF has now come up with another idea to rein in diversion and black marketing (August 27 letter). It wants states to find out whether the big distributors are cornering quantities in excess of what is required (albeit for agricultural use). Being so deeply involved in preparing the ‘supply plan’ and tracking movement of every tonne, asking states to collect data is amusing. Even so, this information is a phone call away from the CEO of fertiliser firms. But, the crucial point is capping won’t help.

Whether it is 100 bags per transaction (or even less), as long as urea is available at a throwaway price, diversion can’t be stopped. The government must recognise this flaw in the existing policy, decontrol urea and introduce DBT.

Author is a policy analyst. Views are personal