Indian Economy and Agriculture

•Agriculture remains to be the livelihood of more that 60% of Population•Contributes about 16% of GDP •Main source of foodgrains•Provider of raw materials for many industries

Agriculture needs support

• Agriculture is less remunerative• Farm produces meet the basic needs• Hence their prices need to be kept low• All countries including Developed

countries provide support to farm producers to remain in agriculture

Agriculture Subsidy worldwide• in the OECD(Orgn for Econ Co-op & Devtt.) gives

agricultural support to farm producers• OECD members (Australia, Austria, Belgium, Canada,

Chile, the Czech Republic,• Denmark, Finland, France, Germany, Greece, Hungary,

Iceland, Ireland, Italy, Japan, Korea,• Luxembourg, Mexico, the Netherlands, New Zealand,

Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

• China, Russia and other communist country provides huge subsidy to the farmers

Extent of Farm subsidy in OECD• In 2009, support to producers in OECD countries was

estimated at USD 253 billion or 22% of aggregate gross farm receipts ,

• The level of• producer support (expressed as % of producer

revenues) in OECD countries in 2007-09• ranged widely: 1% in New Zealand, 4% in Australia, 9%

in the United States, 12% in Mexico, 17% in Canada, 23% in the European Union, 34% in Turkey, 47% in Japan, 52% in Korea, 53% in Iceland, 58% in Switzerland and 61% in Norway.

• Queen Elizabeth received more than £500,000 in 2010

Farm Subsidy in India

• Farmers do not get subsidy directly• Farmers are not kept waiting till sale of

their produce• Indirect subsidy is given in the form of

low priced inputs like seeds, fertilizers, irrigation-water, low cost power etc.

• Free Agricultural information• Fertilizer -the major element of cost

Agriculture and Fertilizers•Needed for increased farm production to feed the fast growing population • Plants need nutrients to grow

Carbon, hydrogen and oxygen - plentiful supply in- air and waterNitrogen, phosphorus,

potassium - macronutrients- chem.fertilizers

Secondary nutrients - Sulphur, calcium, and magnesium Micronutrients -Boron, cobalt, copper, iron, manganese, molybdenum and zinc -

Types of Fertilizers/Manufacturers

• Urea- major source of Nitrogen• DAP- Nitrogen and Phosphorus• SSP- Phosphorus and Sulphur• Complex of N, P and K• Mixtures

Scarcity of raw material

• Nitrogen(Urea)- Hydro carbon-NG, Naphtha, FO, LSHS ( mostly import dependent)

• Phosphorus – Rock Phosphate ( mostly import dependent)

• Potash- Totally import dependent

Subsidized Fertilizers

• India remained to be dependent on imported fertilizers

• Government considered fertilizer as a core sector and started PSUs in this sector

• To ensure supplies at affordable prices, directed the fertilizer manufacturers/importes to sell them at uniform notified low price

• The excess of cost over selling price is given to the sellers as subsidy

Regulatory Mechanism

• To ensure availability of fertilizers at affordable prices

• Declared fertilizer as an essential commodity under EC Act, 1955

• First Fertilizers Control Order-e.f. 1957• To Fix uniform selling price of Fertilizers• Manufacturers/importers to sell them at

govt notified uniform price

Pooled Pricing• Central Pool was to fix uniform price

of a fertilizer for consumers• Uniform price was fixed based on

pooled cost of both domestic and imports

• Central pool operated on a no- profit- no-loss basis

• This pool system continued till 1966 • From 1972, ECA allocation started

Retention Pricing Scheme

• Set up of Sh S S Marathe Committee,1976

• To recommend a pricing policy• That wound ensure a fair return on

invstt.• Retention Pricing Policy introduced

by Resolution dated 1.11.1977• Covered Urea, AS and CAN

SUBSIDY ON FERTILISERS

From 1 Nov.1977 to 31 March 2003Retention Price Scheme (RPS) based on unit-wise cost plus approach

From 1 April 2003New Pricing Scheme (NPS) based on Group Concession Rates

•Subsidy disbursed through Fertiliser manufacturers

Retention Price Scheme (RPS)Retention Price Scheme (RPS) for fertilizer Industry remained in force till 31.3.2003.

Under RPS, retention prices for all urea producing units worked on three year pricing period basis, covering cost of production and 12% post tax return on capital employed.

The difference between the RPS and the maximum selling price of urea paid as subsidy

Under RPS, consumption norms were revised, capacities were re-assessed from 1.4.2000,vintage allowances on capacity and consumption norms was withdrawn and capacity utilization norm was revised to 95%/90% for gas based and Naphtha/FO based units respectively w.e.f. 1.4.2002.

PRICING PERIODS Scheme

Pricing Period

From To Costed Year

RPS I 1.11.1977 31.3.1979

RPS II 1.4.1979 31.3.1982 1977-78

RPS III 1.4.1982 31.3.1985 1980-81

RPS IV 1.4.1985 31.3.1988 1982-83

RPS V 1.4.1988 31.3.1991 1986-87

RPS VI 1.4.1991 31.3.1994 1989-90

RPS VI A 1.4.1994 30.6.1997 1992-93

RPS VII 1.7.1997 31.3.2000 1997-98

RPS VIII 1.4.2000 31.3.2003 1999-00

NPS I 1.4.2003 31.3.2004 1999-00

NPS II 1.4.2004 30.6.2006 1999-00

NPS III 1.10.2006 31.3.2010 2002-03

Components of Retention Price

• Variable Cost• Conversion Cost• Depreciation• Capital Related Charges• Selling Expenses

Details of Elements of Cost - 1• Variable Cost – Direct input

materials based on the preset consumption norms• Gas• Naphtha• FO/LSHS• Coal• Purchased Power• Water• Bags

Details of Elements of Cost - 2

• Conversion Cost – (Fixed cost for a pricing period)• Salaries & Wages• Catalyst• Chemical & Consumables• Repairs & Maintenance• Non-plant Power & Water• Overheads (Factory, Admn., Social)• Insurance• Miscellaneous Income

Details of elements of Cost• Depreciation & Capital Related Charges

• Depreciation (15 years life – 6.33% depreciation)• Interest on long term & short term loan• 12% post tax return on net worth ( Equity capital &

Reserves)

CRC is provided on the normative capital employed i.e. Net fixed Assets plus Normative Working Capital

Details of elements of Cost

• Selling Expenses• Actual selling expenses subject to a

ceiling of Rs.138/MT

Retention Price Components

Variable Cost (Quarterly/Annual)

Conversion Cost (Annually) Capital Related Charges (Beginning of Pricing

Period)

• Cost of Feedstock

Consumption - Normative

Rate - Actual

•Cost of Utilities

Consumption - Normative

Rate - Actual

•Packing Cost

Consumption - Normative

Rate - Actual

• Water

•Salaries and Wages - Actual

•Contract Labours- Actual

•Repairs and Maintenance -

Moderated Actual

•Catalyst - Normative Life with actual rates

•Chemicals and Consumables - Normative

•Overheads - Actuals in the costed year

•Selling Expenses - Combination of Actual and Normative with ceiling

•Depreciation - @ 6.33% on Straight Line Method

•Interest - Actual weighted Average Rate

•Return - 12% post tax grossed up to pretax

Retention Price Rs/MT={(CRC+Conversion Cost)/Assessed Production}+Variable Cost+Selling Expenses

Subsidy=

Retention price minus

Maximum Retail Price

RPS TO NPS

During 1991, a Joint Parliamentary Committee (JPC) was appointed to review the existing RPS and suggest scope for reducing fertilizer prices.

High Powered Committee headed by Dr Hanumantha Rao was appointed in the year 1997 to recommend an alternative pricing mechanism. No decision was taken on the report.

Modified RPS was proposed for consideration

Expenditure Reforms Commission recommended Group based concession scheme for urea manufacturers

Government decided to implement Group based New Pricing Scheme with effect from 1.4.2003

New Pricing Scheme (NPS)

Group concession scheme under NPS introduced from 1.4.2003. All units have been classified into six groups based on vintage and the feedstock.

Stage-I for one year period from 1.4.2003 to 31.3.2004.

Stage-II for two years period from 1.4.2004 to 31.3.2006 extended upto 30.09.2006

Stage-III from 1.10.2006.

For each group, weighted average group price was worked out excluding the outliers (RPS more than +/- 20% of group average).

Concession rate is determined as lower of Unit’s own RP or Group Weighted Average.

Under NPS I and II, outliers above Group Weighted Average were given 50% as outlier benefit. Only MFL was given this benefit upto 30.09.2006.

Variable cost component is escalated on quarterly/yearly basis.

NPS II to NPS III

Costed Year 2002-03

Tightening of Energy Norms resulting into reduction in norms of 11 Units.

Tightening of Consumption norms of Water, Non Plant Water/Power.

Reimbursement of Taxes at actuals. Under NPS I and II, taxes like sales tax, service tax, cess on excise etc. on inputs were restricted at the level of 1.4.2002.

Saving has been allowed at weighted average of basic rates of actual inputs used while in NPS I and II, saving was allowed at basic rate of cheapest input used.

No outlier benefit even if Unit’s retention price is 20% above the Group Weighted Average.

Benefits of Introducing NPS NPS I/II

Increase in efficiency by tightening of norms . Reduction in subsidy by application of Group Weighted Average. Road map for decontrol. 50% of production was under Non-ECA. Units were induced to increase energy efficiency further by allowing them to retain the reduction in energy norms to fund the related expenditure. Units were allowed to retain sales proceeds of all the by products including surplus ammonia. Units were given variable cost plus 35% of gain (IPP – Variable Cost) for production beyond 100% without any ceiling to encourage production from least cost units.

NPS III Increase in efficiency by further tightening of norms (10 Units). Reduction in subsidy by application of Group Weighted Average. 50% of production was under Non-ECA. Road map drawn for conversion of non-gas based Units to gas.

Incentivizing Production Beyond 100%

To encourage Units to produce up to maximum of their abilities, following provisions have been made in NPS III,

Production beyond 100% but up to 110%

Units are given Variable cost plus 35% of gain ( IPP – VC) subject to concession rate for production beyond 100% but up to 110% of their re-assessed capacity.

Production beyond 110%

Units are given Concession Rate subject to IPP for production beyond 110% of their re-assessed capacity.

Surplus Ammonia

As per original provision of NPS III, energy for surplus ammonia was to be deducted at costliest feed/fuel. However, keeping in view the genuine difficulties faced by few Units, recently the provision has been modified by allowing actual mix of feed/fuel for surplus ammonia if the production of surplus ammonia is due to technical reasons. It has also been proposed to deduct 35% of difference between IPP of Ammonia and Variable Cost as share of Government of India.

In case of production of Surplus Ammonia due to other reasons, non-APM mix has to be applied.

NBS for Complex Fertilizers• Subsidy will be fixed for each nutrient (N,P&K)

which is decided to be subsidised. • Subsidy on subsidised fertilizers will be determined

on the basis of nutrient subsidy fixed by the Government for each nutrient and the nutrients contained within the fertilizer.

• Since subsidy is fixed, there will be no MRPs.

• Made Effecitive from 01.04.2010

Advantages envisaged

• promote balanced fertilization• promote availability of better fertilizer products• unleash competitive forces leading to efficiency of

production• promote farm extension services with farmer as the

central focus of the fertilizer companies• better nutrient uptake efficiency through better

application techniques • overall increase in agriculture productivity leading to

better returns to the farmers and long term food security for the country

• Increased investments in the fertilizer sector

NBS- Fixation of per nutrient

• Per nutrient subsidy will be notified by the Government before start of the each financial year

• Per nutrient subsidy will be fixed on the basis of estimated consumption of nutrients, prevailing international prices of major fertilizers, total allocation of subsidy and the targeted farmgate price of major fertilizers

• Per nutrient subsidy is proposed for N, P & K only. A separate subsidy per tonne of fertilisers will be provided for fertilizers carrying secondary and micro-nutrients, in addition to the primary nutrients

• Since there will be no MRPs notified by the Government, no freight equalisation is proposed to be provided.

Operational need of NBS

• Transition from current product based subsidy regime to NBS will involve huge logistics requirements.

• Implementation of NBS is proposed in three phases:• Phase – 1 : NBS at retail points

• Phase – 2 : NBS directly to the farmers without quantitative restrictions

• Phase – 3 : Direct cash transfers to farmers with quantitative restrictions based on land details and subsidy/ consumption norms

Phase – 1 : NBS at retail points

• Fertilizers move at market prices till the last purchase point

• Retailers to sell fertilizers net of subsidy to the farmers.

• Subsidy to be claimed by Retailers in their bank accounts through the designated banks at the block level

• Sale receipts and reconciliation of sales with total receipts of fertilizers to be submitted to bank for collateral.

• Fertilizer movement and distribution to be monitored through FMS from plant / port to the last sale point

Tentative Flow ChartTentative Flow Chart

MP-FS

Fertilizer Companies

Dealers

Fertilizers to Dealers at MP

Fertilizers

FarmersLead Bank of District

Release FS

Sale receipts & reconciliation of sales Credits

FromCentralBank

RaisingBillOf SubsidyBased on Sale

Central Bank

Market prices – MPFertilizer Subsidy – FSSubsidized Price – SP = (MP – FS)

GOI

Allocates funds towards FS

Note: • UNIds can be used with the bags for authentication of sale

of fertilizers

FMS

Issue of Unique

Num. IDs (UNIds)

NBS - Disbursement Mechanism

• Phase – 2 : NBS directly to the farmers• Farmers will get credit for purchase of fertilizers under the Kisan Credit

Card (KCC). [ Cooperative members from PACS]• Farmer will use the credit for purchase of fertilizers at market price

from the retailer.• Retailer will provide a receipt of the sale of fertilizers along with

Unique Identification Code (UIC) of the retailer and Unique bag IDs to the farmers.

• Farmers can get the subsidy equivalent to purchased quantities credited to their account from the banks.

• Bank will be able to receive the subsidy claim from the nodal bank in the district based on the details of KCC, purchase receipts and UIC.

• Till 100% coverage of farmers through KCC, farmers not having KCC can directly claim the applicable subsidy from the designated banks through deposit of bonafide purchase receipts in the banks

Phase – 3 : NBS directly to the farmers with quantitative restrictions

• Based on data collected in Phase – 2 and consumption norms fixed by DAC, quantum eligibility for subsidized fertilizers will be fixed in each KCC

• NBS will be directly credited to the KCC account of the farmers based on purchase receipts for eligible quantities of fertilizers

• Farmers free to purchase fertilizers beyond eligible quantities from the open market. However, subsidy remains fixed based on eligible quantum

Problems encountered

• Prices of fertilizers under NBS increased manifold along with fixed subsidies

• Fertilizers went beyond purchsing power of farmers

• Increase in unsold stock• Govt. resorted to monitor prices with ref

to related cost.• Cost Accountants role increased

Direct subsidy to farmers

• Subsidy disbursement through fertilizer industry is in effect subsidy to the farmers the benefit of which is enjoyed by the country as a whole

• Fertilizer units are just a medium for proper execution

• Higher fertilizer subsidy is basically a transfer of Govt revenue to Oil and gas sector companies /monopolies/cartels

• Gas pricing in USD is a damaging proposition resulting in higher subsidy

Thank you