44 CHAPTER 5


eral attempts were made to increase the farmgate price of urea as well as to reform the policy governing its production and distribution. Despite some setbacks, the farmgate price was increased on six occasions, rising from Rs 2,350 per metric ton in 1990/91 to Rs 4,830/ton in 2002. It remained unchanged between 2002 and 2009. In February 2010, the cabinet approved another increase in the price of urea by 10 percent from Rs 4,830/ton to Rs 5,310/ton (Telegraph 2010).


After long and tortuous deliberations, the RPS, which provided the policy framework for urea production and distribution, was replaced by the NPS in 2003. However, this three-stage reform process brought only modest changes to the policy framework. In February 2010, the government announced a nutrient-based fertilizer policy in order to address the nutrient imbalance that was evident in Indian agriculture. The government hopes that the nutri- ent-based scheme will bring down the expenditure on subsidy. It continues to push for greater efficiency in fertilizer production. At the same time, it is committed to retaining the subsidy on fertilizers, in some form, for the fore- seeable future.


Emergence and Establishment of Fertilizer Subsidies, Late 1977 to 1991


Fertilizer pricing has been largely determined by the government since Inde- pendence. The Fertilizer Control Order, formulated to allow the government to fix selling prices, went into effect in 1957. A Central Fertilizer Pool was created to deal with different domestic and international prices. Fertilizer price was determined on the basis of the pooled cost of obtaining fertilizer from imports and from domestic producers; the pool operated on a no-profit, no-loss basis, thus placing no burden on the central budget. During this period, domestic production and consumption of fertilizers were low. This scenario changed during the 1970s on account of the oil shocks and the new policy relating to fertilizers.


In 1977, as a part of its Green Revolution strategy, the GoI established a policy to encourage the production and distribution of fertilizers in India and to facilitate their use. The Retention Price Scheme (RPS), as the policy was called, set an ex-factory price for fertilizer (called the retention price) that was specific to each unit, depending on the capacity utilization and raw- materials consumption of each and without any regard for common standards of efficiency. The pricing mechanism allowed for an after-tax return of 12 percent on the net worth of the unit. The farmer bought fertilizers at a gov- ernment-controlled price known as the issue price.1 The difference between


1 The issue price is the price at which urea is sold. This is also known as the farmgate price or the maximum retail price (MRP) and is fixed by the government.


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