India fertiliser subsidy backfires, food imports grow By: Geeta...

India fertiliser subsidy backfires, food imports grow
By: Geeta Anand
From: The Wall Street Journal
February 23, 2010 3:41PM
Growing disaster: Urea costs substantially less than other fertilisers and farmers' increasing use of the nitrogen-rich material is leaving the soil very much damaged. Source: Bloomberg

INDIA'S Green Revolution is withering.

In the 1970s, India dramatically increased food production, finally allowing this giant country to feed itself. But government efforts to continue that miracle by encouraging farmers to use fertilisers have backfired, forcing the country to expand its reliance on imported food.

India has been providing farmers with heavily subsidised fertiliser for more than three decades. The overuse of one type - urea - is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19 per cent last year. The country now produces less rice per hectare than its far poorer neighbours, Pakistan, Sri Lanka and Bangladesh.

Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy.

Last Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea - meaning farmers will still have a big incentive to use too much of it.
The setback of the Green Revolution matters enormously to India's future. The country of 1.2 billion has positioned itself as a driver of global growth and as a significant commercial power in coming decades.

India will most likely struggle to get there, and to return to the heady days of 9 per cent economic growth, unless it figures out how to reinvigorate its agricultural sector, on which the majority of its citizens still rely for a living.

Agriculture has lagged behind other industries such as manufacturing and services, posting less than 2 per cent growth in the latest reports on gross domestic product. And double-digit food inflation and declining yields spell less money in the pockets of rural Indians.

India spends almost twice as much on food imports today as it did in 2002, according to the Ministry of Agriculture. Wheat imports hit 1.7m tonnes in 2008, up from about 1300t in 2002. Food prices rose 19 per cent last year.

To be sure, there are bright spots. Indian officials say the country may produce a record wheat harvest this year because of good weather conditions, unless rain or hail appear. The wheat harvest last year was better than expected, making some hopeful that the importing trend will be reversed.

Behind the worsening picture is the government's agricultural policy. In an effort to boost food production, win farmer votes and encourage the domestic fertiliser industry, the government has increased its subsidy of urea over the years, and now pays about half of the domestic industry's cost of production.

Mr Singh's government, recognising the policy failure, announced a year ago that it intended to drop the existing subsidy system in favour of a new plan. But allowing urea's price to increase significantly would almost certainly trigger protests in rural India, which contains 70 per cent of the electorate, political observers say.

The ministers of fertilisers and agriculture each declined requests for interviews.

This is politically very difficult, says U.S. Awasti, managing director of the Indian Farmers Fertiliser Co-operative and an informal adviser to government officials on the issue. The co-operative of 50m farmers is the largest fertiliser producer in the country.

Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts.

Like humans, plants need balanced diets to thrive. Too much urea oversaturates plants with nitrogen without replenishing other nutrients that are vitally important, including phosphorus, potassium, sulphur, magnesium and calcium.

The government has subsidised other fertilisers besides urea. In budget crunches, subsidies on those fertilisers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertiliser, making it a political hot potato to raise the price.

As the soil's fertility has declined, farmers under pressure to increase output have spread even more urea on their land.
Kamaljit Singh is a 55-year-old farmer in the town of Marauli Kalan in the state of Punjab, the breadbasket of India. He says farmers feel stuck. The soil health is deteriorating, but we don't know how to make it better, he says. As the fertility of the soil is declining, more fertiliser is required.

Increased demand and the soaring price of hydrocarbons, the main ingredient of many fertilisers, have taken India's annual subsidy bill to more than $US20 billion ($22.2bn) last year, from about $US640m in 1976.

The only way for agricultural yields to rise again is for the government to give farmers the incentives and the products to provide balanced nutrition to their crops, says Bimal Goculdas, chief executive officer of Dharamsi Morarji Chemical, one of the oldest fertiliser firms in India.

Agriculture experts say the country can't afford to wait. There are big problems for the future of food production in India if these problems are not addressed now, says Reyes Tirado, an agricultural scientist and researcher for Greenpeace Research Laboratories, an arm of advocacy group Greenpeace International.

Under the new plan, the government will offer subsidies to fertiliser companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertiliser products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients.

Ultimately, the government plans to pay the subsidy directly to farmers, who will be able to buy products of their choice, including but not limited to urea.

Mr Singh's government, however, said it would continue to subsidise urea, although it would set the price 10 per cent higher.

Mr Awasti, the fertiliser co-operative head, says the continuing urea subsidy means that farmers are likely to still use too much of it. The government is opting, as with any very difficult change, to adopt it in phases, he says. The groupings boss says he believes that the urea subsidy will be dropped altogether in a year.

In the early years after India gained independence in 1947, the country couldn't even dream of feeding its population.
Importing food wasn't possible because India lacked the cash to pay. India relied on food donated by the US government.

In 1967, Indira Gandhi, the Prime Minister of the time, imported 18,000t of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities.

Those seeds required chemical fertilisers to maximise yield. The challenge was to make fertilisers affordable to farmers who lacked the cash to pay for even the basics - food, clothing and shelter.

Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertiliser companies, who agreed to sell for less than the cost of production, at prices set by the government.

The subsidies were designed to make up the difference between the production price and sale price - and to give the producers a 12 per cent after-tax return on any equity investment.

Bhupinder Singh's wheat yield has been barely holding steady lately.

Fertiliser manufacturing companies sprang up around the country. Nagarjuna Fertilisers & Chemicals became one of the most profitable publicly listed companies in India.

In 1991, with the cost of the subsidy weighing heavily on India's finances, Manmohan Singh, then finance minister, pushed to eliminate it. Most fertiliser companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.

The business interests lobbied and the business interests prevailed, says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilisers except for urea.

That's when the imbalanced use of fertilizers began, says Pratap Narayan, ex-director-general of industry group the Fertiliser Association of India.

With urea selling for a fraction of the price of other fertilisers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended ratio, according to the Indian Journal of Fertilisers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show.

This type of ratio is a disaster, Mr Gulati says. It is keeping India from reaching the production levels that the hybrid seeds have the power to yield.

Producers of phosphorus-based fertilisers struggled. The government reintroduced a small subsidy on phosphorus fertilisers, but at times it didn't cover the difference between the government-set price and the actual cost of production. Dharamsi Morarji, one of the oldest fertiliser companies in India, closed some plants.

With scant domestic supply, India had to import 7m tonnes of phosphorus-based fertilisers last year, according to a senior official at the Ministry of Chemicals and Fertilisers.

Twenty-one per cent of the urea, 67 per cent of the phosphorus-based fertilisers and 100 per cent of the potash-rich fertilisers sold in India in the financial year ended March 2009 were imported, according to a report this month from Fitch Ratings.

In the northern state of Punjab, Bhupinder Singh, a turbaned, grey-bearded 55-year-old farmer, stood barefoot in his wheat field in December and pointed to the corner where he had just spread a 110-pound bag of urea.

Without the urea, my crop looks sick, he said, picking up a few stalks of the young wheat crop and twirling them in his fingers. The soil is getting weaker and weaker over the last 10 to 15 years. We need more and more urea to get the same yield.

Mr Singh farms 10 acres in Sohian, a town about 25 miles from the industrial city of Ludhiana. He said his yields of rice have fallen to three tonnes per acre, from 3.3 tonnes five years ago. By using twice as much urea, he's been able to squeeze a little higher yield of wheat from the soil - two tonnes per acre, versus 1.7 tonnes five years ago.

He said both the wheat and rice harvests should be bigger, considering that he's using so much more urea today than he did five years ago. Adding urea doesn't have the effect it did in the past, he said, but it's so cheap that it's better than adding nothing at all.

Land needs to be watered more when fertiliser is used, and Mr Singh worries about the water table under his land. When his parents dug the first well here in 1960, the water table lay 5 feet below the ground, he says. He recently had the same well dug to 55 feet to get enough water.

The future is not good here, he said, shaking his head.

Balvir Singh, an agriculture development officer for Punjab state, says it is as if farmers have become addicted to urea.
One farmer sees another's field looking greener, so he adds more urea, he says. A farmer will become bankrupt, but he will not stop using urea.

The fertiliser industry, which had lobbied to retain subsidies back in 1991, now sees them as a problem. That's because the government, trying to rein in spending, has been squeezing the reimbursement promised to fertiliser companies.

The subsidy theoretically gives companies a 12 per cent profit margin. Today, in part because of the way the government calculates the subsidy, it offers the average company a 3 per cent margin, according to K Rahul Raju, joint managing director of Nagarjuna Fertilisers & Chemicals, and Mr Awasti, the fertiliser co-operative head.

Farmers in Punjab are increasingly glum. Farming is in shambles, said Kamaljit Singh, standing with fellow farmers in the courtyard of the village agriculture co-operative. If we have to support our growing families and our increasing population on this land, we must get higher yields. Otherwise our families and our nation will suffer.

Additional reporting by Arlene Chang