View: Give income support, not fertiliser subsidy

The government plans to increase the subsidy for di-ammonium phosphate (DAP) fertiliser, in response to a rise in its global prices. Farmers need to be insulated from input price shocks, true, but raising subsidy is a suboptimal solution. The higher subsidy of ₹1,200 per bag of DAP instead of ₹500 will now allow companies retain their price at the old price of ₹1,200 instead of ₹2,400. A superior solution is for the government to merge input subsidies into the income support scheme, in which ₹6,000 per farm family is directly transferred to the farmer’s account. It will encourage balanced use of fertilisers and help incentivise efficient agronomy.

Fertiliser subsidy is paid to fertiliser companies, which are free to set ‘reasonable’ prices. This must change. With the direct benefit transfer mechanism for fertilisers in place since October 2016, there is no reason why subsidy should be given to manufacturing units. A switch to the income support scheme to farmers will also prevent malpractices such as units claiming higher subsidies by importing fertilisers at inflated prices. Income support schemes avoid the stigma attached to trade-distorting subsidies in international trade. Some states that include Andhra Pradesh, Odisha and Chhattisgarh have implemented income transfer schemes for farmers. Most of these schemes target the owner of the land, bypassing the tenant. Odisha’s scheme is a welcome outlier and covers small and marginal farmers, tenants, landless agricultural households and sharecroppers.

Rightly, agricultural economist Ashok Gulati has underscored the need to refine these schemes to make them more efficient, inclusive and free from leakages. Efficient fertiliser production would be a by-product.