Indian Fertilizer Subsidies

Indian Fertilizer Subsidies began in 1977 with the introduction of the Retention Price cum Subsidy scheme (RPS). RPS, in which the government set fertilizer prices for farmers at below the cost of production, remained in place until 2003, although fertilizer prices rose rapidly in the 1990s under a neoliberal economic agenda. In 2003, RPS was replaced with the New Pricing Scheme (NPS).

1977: Retention Price cum Subsidy scheme (RPS)

 * "Government introduced the Retention Price cum Subsidy scheme (RPS), a cost-plus approach, for nitrogenous fertilizers in November 1977 and extended to complex fertilizers in February 1979. Under RPS the retail price of fertilizers wasFebruary 1979. Under RPS the retail price of fertilizers was fixed and was uniform throughout the country and difference between the retention price (adjusted for freight and dealer’s margin) and the price at which the fertilizers were sold to the farmer was paid back to the manufacturer as subsidy."

In other words, under RPS, the government fixed the consumer price of fertilizer and then paid the fertilizer manufacturer enough to cover the cost of production plus 12% profit. All fertilizers were sold at the government-set price, so imported fertilizers were subsidized as well.

In August 1992, phospahtic and potassic fertilizers were removed from the RPS system. Later, in October 1994, ammonium chloride, ammonium sulphate and calcium ammonium nitrate were also removed, leaving only urea. RPS was dismantled in March 31, 2003 and was replaced with the New Pricing Scheme (NPS) on April 1, 2003.

Urea prices were set as follows:
 * 1977-March 10, 1979: 1550 Rs
 * March 10, 1979-1980: 1450 Rs
 * 1980-July 11, 1981: 2000 Rs
 * July 11, 1981-June 29, 1983: 2350 Rs
 * June 29, 1983-January 31, 1986: 2150 Rs
 * January 31, 1986-July 25, 1991: 2350 Rs
 * July 25, 1991-August 14, 1991: 3300 Rs (a 40% price hike)
 * August 14, 1991-August 25, 1992: 3060 Rs (a 30% price hike compared to 2350 Rs)
 * August 25, 1992-June 10, 1994: 2760 Rs
 * June 10, 1994-February 21, 1997: 3320 Rs
 * February 21, 1997-January 21, 1999: 3660 Rs
 * January 21, 1999-February 29, 2000: 4000 Rs
 * February 29, 2000-February 28, 2002: 4600 Rs
 * February 28, 2002-March 1, 2003: 4830 Rs.
 * March 1, 2003-March 31, 2003: 5070 Rs

Fertilizer prices remained stable throughout the 1980s, jumping a mere 17.5% during the decade. In the 1990s, prices increased more rapidly, from 2350 Rs at the start of the decade to 4000 Rs at end of 1999, a 70% increase. In the first three years of the 2000s, price continued rising, from 4000 Rs to 5070 Rs, an increase of 26.8%.

1991: Neoliberal Economic Program
When India's New Economic Policy of 1991 was instituted, cuts in fertilizer subsidies were a part of the package. Fertilizer prices had remained the same for the previous decade. Government spending on fertilizer subsidies had increased from $780 million in 1985 to over $1.5 billion in 1990. In the summer of 1991, Indian Finance Minister Manmohan Singh announced a 40 percent price hike for fertilizer. The announcement was met with protest:


 * "In the first stirrings of popular discontent against India's structural reforms program, farmers in south India have rioted as north India's powerful peasant groups plan a major agitation.


 * "Protests are mounting against the Indian government's proposal to cutback subsidies on fertilizers -- part of this month's budgetary package to reduce the country's fiscal deficit.


 * "Farmers in southern Andhra Pradesh state raided warehouses, looted trucks carrying fertilizers and demonstrated in front of government offices this week."

After an initial 40% price increase for urea in late July 1991, the government backed down on August 14, lowering prices so the increase was only a 30% one. For the next decade, prices continued to rise at a rapid pace.

Despite the price increases to farmers, the cost of urea subsidies to the Indian government remained high initially - in part because the 23% devaluation of the rupee in mid-1991 made imports more expensive.

2003: New Pricing Scheme
RPS had been criticized "for being cost plus in nature and not providing strong incentives for encouraging efficiency." In other words, no matter the cost of production incurred by any particular plant, it would be paid a guaranteed profit. Therefore, there was no incentive to upgrade equipment or facilities or even work toward lowering costs, as the profit would always be a set percent of the costs. The more it cost to produce a fertilizer, the more the profit would be.

In April 1998, a "High Powered Fertilizer Pricing Policy Review Committee (HPC)" reviewed the subsidization system and suggested an alternative approach. After various government reviews, the RPS system was ended March 31, 2003 and the New Pricing Scheme (NPS) replaced it the following day. "It aims at inducing the urea units to achieve internationally competitive levels of efficiency, besides bringing in greater transparency and simplification in subsidy administration." Under the new system, fertilizer manufacturers are still subsidized. However, instead of receiving the difference between the government-set consumer price and the cost of production plus profit, plants receive a set amount based on the age of the plant and the amount of feedstock used.

Related Sourcewatch articles

 * Agriculture in India
 * India's New Economic Policy of 1991
 * Indian Farmer Suicides

External Resources

 * Fertilizer Subsidies, Indiastat.com.
 * IndianFertilizer.com

External Articles
2010s:
 * "Govt cuts subsidy on key fertilizers," The Hindu, March 1, 2012.
 * C.K. Nayak and Rajendra Jadhav, "Govt cuts subsidy on most fertilizers for 2012/13," Reuters, March 1, 2012.
 * Rituraj Tiwari, "Fertiliser subsidy to hit Rs 1 lakh crore; ministry to seek more funds," The Economic Times, February 8, 2012.
 * "India's Plan to Reduce Fertilizer Subsidies Has Negative Implications - Goldman," Street Insider, January 20, 2012.
 * Aman Malik, "Fertilizer subsidy bill may touch Rs. 95,000 cr," LiveMint.com, November 10, 2011.
 * Shashanka Bhide, "Towards reducing fertiliser subsidy," The Hindu Business Line, August 10, 2011.
 * Srijit Mishra and Gopikrishna SR, "Nutrient Based Subsidy (NBS) & Support Systems for Ecological Fertilization in Indian Agriculture," Greenpeace, April 2010.
 * Geeta Anand, "Green Revolution in India Wilts as Subsidies Backfire," Wall Street Journal, February 22, 2010.

2000s:
 * Vijay Paul Sharma and Hrima Thaker, "Fertilizer Subsidy in India: Who are the Beneficiaries?," Indian Institute of Management Ahmedabad, July 2009.

1990s:

1980s:
 * Rabbi, "Fertiliser Subsidy in India,"Economic and Political Weekly, Vol. 21, No. 41 (Oct. 11, 1986), pp. 1786-1788.