India’s agricultural reforms – fast and slow

Author Mike Nash, Senior Editor, Fertilizers

Indian farm reforms are a curious mix of gung-ho speed and cautious timidity.

In 2014, when Narendra Modi was elected Indian prime minister with a great majority, there was optimism in the global fertilizer market that he might just have the political mandate to start to reform the country’s rather antiquated fertilizer subsidy system. But while Modi’s administration has ushered in some impressive and much-needed reforms in the sector during his tenure, the huge discrepancy between urea and phosphate/potash prices paid by farmers remains unresolved.

The last significant reform was in 2010, when the nutrient-based subsidy (NBS) was introduced — a curiously titled package that actually does anything but encourage balanced fertilizer usage, for the simple reason that urea, India’s most consumed fertilizer, was effectively left out of the system. As my nitrogen editor said to me at the time, “India bottled it” by failing to include urea under the NBS and tackle the old-fashioned way it purchases urea through periodic and global market-distorting, state-sanctioned tenders.

While potash and phosphates were “decontrolled” under the NBS — essentially allowing a modicum of free market pricing, ostensibly capped by a maximum retail price — urea pricing and distribution remain the purview of the government, leading to a wide gap in prices. The Fertiliser Association of India estimates that India subsidises 75pc of the cost of urea, while the subsidy on other fertilizers is 30-35pc.

No wonder that Indian farmers buy more urea than anything else. But this has agricultural and environmental consequences because of an overuse of nitrogen. And it has kept Delhi locked into a cycle of massive subsidy bills too. India typically spends $11bn-12bn/yr just on fertilizer subsidies, with urea accounting for the lion’s share.

The government’s reticence in tackling the nitrogen subsidy issue is understandable. Indian farmers are a large part of the voting population. Just witness the endless rounds of talks currently taking place between Delhi and farmer union officials over proposed agricultural market reforms and plans to liberalise the sector.

Farmers want to repeal three laws passed in parliament in September. The majority of farmers sell crops directly to the government under the minimum support price (MSP) procurement system, but under the new legislation they may have to sell crops at market prices in some instances. Tensions flared after the laws were passed, with protests still under way in Delhi after running throughout December.

Many of India’s farming laws date from the 1950s and 1960s, when India was a very different country. So the government is right to push reform through. But while the sentiment is laudable, the speed at which it has been pushed through parliament has been questioned by opposition parties. Farmers have been brought to the table for at least eight rounds of talks only after the acts have been passed.

The Indian fertilizer sector does a remarkable job of pushing out its wares to farmers in a difficult and complex business environment. Constant delays — of months or even years — in the government’s settlement of the subsidy bill do not help. So the sector needs reform and support.

The first thing the government needs to do is incorporate urea into the decontrolled category of fertilizers, treating it the same as any other. It also needs to allow private-sector companies to import as required, removing the expectation in the market every couple of months that India is about to issue a tender and buy 1mn-2mn t of urea. This sometimes skews market prices ahead of any such tender, and is not an efficient or particularly canny way to buy the stuff.

Thirdly, the subsidy should be paid directly to the farmer rather than distributed through the fertilizer industry itself, which would lessen the huge logistical and administrative burdens on the sector. It would also give farmers the ability to buy the fertilizers that best meet their needs.

The world’s largest democracy is not an easy country to manage — not only because of its size, but also because of its sometimes wildly varied yet competing needs. Reforms have to be made through consensus and consultation. The farming reforms make sense, but they also need to be part of a wider reformation of the entire sector, including fertilizer subsidies that tackle the cost of farmer inputs as well as outputs. Only such an approach will truly set one of the world’s largest fertilizer markets free.

Argus will be covering this and other key developments throughout the year, via our price reporting, short and mid to long term outlook services.

View a brochure profiling our services here or read more online here.

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