48 CHAPTER 5


to more waste of nitrogenous fertilizers and more groundwater pollution, and it ultimately lowers the crop response rate. In Andhra Pradesh, where there is deficiency in all soil nutrients and a higher crop response rate, yields might be increased with the aid of adequate infrastructure and a suitable policy environment that is able to balance the productivity concerns as well as the environmental and fiscal concerns. Such a policy environment would reduce fertilizer use in Punjab and increase it in those parts of Andhra Pradesh where the production can increase as a result of additional application of fertil- izer. Further, both Punjab and Andhra Pradesh have a lower crop response rate than the rest of India. Together, these data suggest that a combination of suitable policy, infrastructure, and technology can work toward a more consistent application of fertilizer across India (Vashishtha 2006). Moreover, intensive soil testing could lead to more judicious application of fertilizers and subsequent savings on fertilizer subsidy.


Improving Efficiency in the Allocation of Natural Gas The government aims to achieve its policy goal of fertilizer subsidy reduction without resorting to distortions in the allocation of resources in other mar- kets, most notably in the natural gas market. In the past, the government- owned hydrocarbon firms supplied domestically extracted natural gas to the fertilizer industry at a government-determined price, called the administered price. As the domestic supply of natural gas declined in the late 1990s and the government’s policy on hydrocarbon pricing was liberalized, the amount of gas available at the administered price to the fertilizer industry declined. Although new reserves of gas have been discovered since then, in keeping with the goals of liberalizaton, the government’s policy has been to make most of the newly found gas available at market prices. However, the govern- ment has also made a commitment to supply subsidized gas to the fertilizer industry by maintaining a part of the new gas supply under its administered- price mechanism.


Efforts to Reduce the Fertilizer Subsidy, 1991–2003 Since 1991, the government has made several attempts to rationalize or reduce the fertilizer subsidy to address fiscal, distributional, and environmental con- cerns. This section discusses the government’s efforts to change that frame- work to bring about greater efficiency in the production of fertilizers, to reduce expenditure on the fertilizer subsidy, to bring about regional and nutritional balance in the use of fertilizers, and to better target the fertil- izer subsidy.


Because the fertilizer subsidy to farmers is channeled through the fertil- izer firms, economists argue that both farmers and the industry receive a


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