FERTILIZER POLICY: EVOLUTION AND REFORM 49
portion of it (Gulati and Narayanan 2003). The government therefore has two options for rationaling fertilizer subsidies. One approach would be to increase the farmgate price—the price at which the farmer purchases the fertilizer— allowing the government to reduce the total amount spent on fertilizer sub- sidy. However, this move would be politically costly in a country where 80 percent of the farms are categorized as small or marginal (under 2 hectares). Although prices have increased over the past fifteen years, the increases do not reflect increases in the cost of production. An alternative pricing policy that might have less problematic distributional consequences would provide a fixed amount of subsidized fertilizer to all farmers and charge market prices for amounts over that quota. This scheme would effectively reduce the sub- sidy to the owners of large and medium-sized farms, who need to buy more (ERC 2000).
A second way of reducing the government’s total expenditure on fertilizer subsidy would be to force higher efficiency standards on the domestic fertil- izer industry and change the policy governing the pricing and distribution of fertilizer (HPRC 1998; ERC 2000). This approach would require the govern- ment to transfer money directly to farmers and completely decontrol the fer- tilizer industry. Such restructuring would more fully address the distributional concerns raised by scholars and policymakers. Although the government has attempted to both increase the farmgate price and change the policy frame- work for fertilizer production and distribution, the resultant impact on the subsidy bill has not been significant. In the next two sections, we investigate the government’s attempts at altering the pricing mechanism and making the fertilizer industry more efficient.
Increases in the Farmgate Price of Urea
As mentioned earlier, the farmgate price of fertilizers, which is determined by the MoF, remained unchanged between July 1981 and July 1991. In August 1991, faced with a balance-of-payments crisis and a need to borrow from the IMF, the government announced an increase of 30 percent in the issue price of urea, raising it to Rs 3,060/ton. The selling price of urea was subsequently reduced in August 1992 by 10 percent, to Rs 2,760/ton, but increased again in June 1994 by 20 percent, to Rs 3,320/ton; by 10 percent in February 1997, to Rs 3,660/ton; by 10 percent in January 1999, to Rs 4,000/ton; by 15 per- cent in February 2000, to Rs 4,600/ton; by 5 percent in February 2002, to Rs 4,830/ton; and, finally, by 10 percent in February 2010, to Rs 5,310/ton. In addition to these increases, the government also attempted to increase the price of urea through the budgetary process in 1998 and again in 2003 but was unsuccessful. The budget presented in February 2003 announced an increase in the price of urea by a mere Rs 240/ton, which works out to a
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