56 CHAPTER 5


duction from existing units, encourage joint ventures abroad, convert non- gas-based production units to gas, and improve the efficiency in the distribu- tion and movement of urea (DoF 2007, 20). Stage 3 would run until March 2010. Under this plan, all naphtha-based urea plants were required to switch to natural gas within the next three years.


The framework was adopted on account of two factors. First, given the agrarian crisis of the past decade, the farmgate price of urea was left un- changed to encourage farmers to increase fertilizer use. Second, it was antici- pated that fertilizer consumption would have to increase to support the increasing demand for food. Given that the global price of urea was higher than the domestic price, and given that fertilizer was considered a strategic commodity, increasing dependence on imports was not considered an option. Emphasis was instead given to building domestic capacity for urea produc- tion. Neither the government nor the industry was entirely satisfied with the recommendations of the Alagh Committee.5


At present, urea is the only fertilizer whose production is controlled by government policy and which is sold at a government-fixed retail price. Decontrolled phosphatic and potassic fertilizers are sold at indicative retail prices, and the price of single superphosphate is determined by state govern- ments. Thus, discussion here of rationalizing fertilizer subsidies focuses on decontrolling the nitrogenous-fertilizer sector and the pricing and distribu- tion policies that shape it. The existing price structure favors the purchase of nitrogenous over potassic and phosphoric fertilizers and has already led to an unbalanced use of fertilizers that may have negative consequences for crop productivity and the environment.


In 2007, the government appointed a GoM consisting of then–finance minister P. Chidambaram, agriculture minister Sharad Pawar, and chemicals and fertilizers minister Ram Vilas Paswan. The GoM’s mandate was to rec- oncile the somewhat contradictory objectives of reducing the subsidy bill and meeting the increasing demand for fertilizer. At the time, the subsidy bill was expected to reach Rs 500 billion, while the winter cropping season was facing a shortage of fertilizers (Financial Express 2007a). The government also wanted to look into the feasibility of delivering the subsidy directly to the farmers. In its deliberations, this GoM started considering moving from a product-based subsidy regime to a nutrient-based subsidy regime (Jandhyala 2007). Further, the crosscutting policy area of natural gas availability, allo- cation, and pricing continued to be an important part of the discussion on fertilizer subsidies (Mehdudia 2007). While these deliberations continued,


5 Interviews with government and industry officials, New Delhi, July 2007.


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