No direct cash transfers under revised fertilizer subsidy regime

New system to settle dues to fertilizer firms within a week, record detailed transaction data at time of sale

New Delhi: The direct benefits transfer (DBT) scheme for fertilizers that will go on trial in eight districts this month will not entail what its name suggests— the transfer of cash to farmers’ bank accounts.

Under the direct transfer of liquefied petroleum gas (LPG) subsidy, customers pay the entire amount for cooking gas, and the government transfers the subsidy to the individual’s bank account.

In the case of fertilizer subsidies to the country’s 140 million farmers, the government has decided against such bank transfers, since the subsidy component in fertilizer is much higher than that in cooking gas, and farmers’ finances would be stretched to pay the entire amount upfront, especially since fertilizer has to be purchased in larger quantities.

What will the trial do then?

The new system, which will be tested, will settle dues to the company for selling the commodity at the state-set price within a week, unlike the existing system where payments to companies often get delayed. Payments due in the last quarter often get spilled over to the next fiscal year.

At the time of fertilizer sale, a data capture system will gather a variety of information on the buyer and the land where it will be used. This is designed to discourage the diversion of fertilizer for industrial purposes and to prevent it from being smuggled across international borders.

The finance ministry has allocated Rs.70,000 crore as fertilizer subsidy for 2016-17.

“We cannot expect farmers to pay about Rs.20,000 upfront for a tonne of urea and then wait for bank transfer of subsidy on the product, which is at present sold at Rs.5,360 a tonne (the current subsidized price),” said a government official involved in the scheme’s roll-out, who asked not to be named.

A digital network will capture details of the soil’s requirement assessed through a test, the amount of purchased fertilizer, the Aadhaar number of the farmer, details of the land where it will be used and the nature of its holding such as ownership or lease. This will be done at the time of sale.

The official explained that in the beginning, there will be no restriction on the amount of subsidized fertilizer that can be purchased by a farmer, unlike subsidized LPG supply, which is capped at 12 cylinders a year for the eligible consumers. Only those with annual income less than Rs.10 lakh a year are eligible for the LPG subsidy.

Trial run of the new fertilizer subsidy framework will be rolled out in two districts in Andhra Pradesh, two in Haryana and one each in Bihar, West Bengal, Madhya Pradesh and Maharashtra.

Industry executives acknowledged that the revised scheme was an improvement, but was way short of the original subsidy reform.

“This is a step forward as this leads to creation of digital infrastructure for capturing relevant data. However, shifting the basis for compensating companies from consignments received in a district to the actual sale to farmers will lead to delays in payments to companies. Who will pay for the extra interest cost? We cannot recover that from the farmer,” said a director on the board of a leading fertilizer producer, declining to be named.

This person also said that the market pricing of fertilizers and direct cash subsidy transfers to farmers, if implemented, would correct a major distortion in the economy. “At the moment, the minimum support price of farm produce procured by government is determined partly based on the fertilizer price paid by the farmer. The benefit of the lower purchase price of fertilizers thus do not go to the farmer, but goes to the urban population who get farm produce at an artificially lower price,” the person said.

Fertilizer accounts for about 9% of the cost of farming and market pricing is unlikely to hurt them, the person added.

Fertilizers are among the three major items, along with oil and food, that the government subsidizes heavily. The finance ministry has allocated Rs.2.3 trillion to subsidize these three items in the current fiscal year. The government official cited earlier said that the coating of urea in neem has led to a reduction in diversion of the commodity for industrial purposes, which was also one of the reasons for dropping the idea of direct cash transfers for fertilizer subsidy.

Experts said the introduction of payments banks, a new class of service providers, will fuel further growth of the financial system in rural areas that could in the near future facilitate full-fledged direct cash transfer of subsidies in fertilizers too.

“Besides a robust growth in the expansion of mobile-phone services in the interiors of the country, we also see the telecom industry preparing to roll out payments bank services. This is what is going to help in ensuring that every beneficiary of state support is included in the financial system. Since the know-your-customer (KYC) norms for telecom and banking services are more or less similar, payments banks can hit the ground running. In the next 2-3 years, this could result in an expansion of banking customers by up to 35%,” said Kalpesh Mehta, a partner at Deloitte in India. The Reserve Bank of India has given in-principle approval for 11 payments banks, three of which have surrendered the licences.