public policy

How the government quietly scaled back its ambitious plans to reform fertiliser subsidies

A special four-part series on what went wrong with the government’s attempts to plug the leakages in India’s Rs 70,000 crore annual fertiliser subsidy.

The Indian government spends close to 1% of the country’s gross domestic product on fertiliser subsidies every year. Only 35% of this subsidy reaches farmers, according to the Economic Survey of India 2015-’16.

To plug the leakages, the Bharatiya Janata Party-led National Democratic Alliance government has decided to carry out an ambitious and fundamental change to how the country provides subsidised fertilisers to farmers. The previous Congress-led United Progressive Alliance government had taken some steps in this direction. The BJP is hoping to take the last one, which involves the use of three government databases, including Aadhaar, the database that holds the biometric-based 12-digit identification numbers of 116 crore residents.

In 2016, the government began testing the fertiliser subsidy reforms in 19 districts. But the nationwide roll-out has been delayed by more than six months. In this four-part series, explains where things got stuck. This is part one.

In the summer of 2016, when Babu Rao, a farmer in Andhra Pradesh’s Krishna district, went to buy fertilisers for his 20-acre field, he did not realise that he was taking part in an ambitious experiment to reform the Indian government’s delivery system for fertiliser subsidies.

For decades, the government has paid high prices to manufacturing companies to help them produce and sell fertilisers at cheaper rates to farmers. But this system is prone to massive leakages. To plug them, the government wanted to identify farmers as a first step in transferring the subsidies directly to them.

For this, it launched an experiment in two districts of Andhra Pradesh in June 2016. It supplied point of sale machines to fertiliser retail shops that came equipped with fingerprint scanners.

The retailer in Rao’s area used the machine to scan the farmer’s fingerprints and confirm his identity using the Aadhaar database of biometric-based unique identification numbers. The machine also checked digitised land ownership records to verify whether Rao was actually a farmer holding a specific parcel of land in his name. It also looked up the database of soil health cards, which contain information on the soil conditions of individual farms, to determine how much fertiliser Rao should have been allotted for judicious use on his farm.

Replicated across the country, this new system could potentially revolutionise the way farmers access cheap fertilisers, while making sure they do not overuse them. It could plug the leakage of Rs 45,000 crore of public funds spent on fertiliser subsidies every year.

But the new system did not entirely work and the government has quietly scaled back its plans.

What went wrong?

The problems of the old system

For years, it has been an open secret that India’s fertiliser subsidies are getting pilfered.

The problem is structural: the subsidies are routed to companies and not farmers. The companies produce both nitrogen-based urea and phosphate-based fertilisers according to government specifications. The government makes the first payment, which ranges between 85% to 95%, once the companies deliver fertilisers to district-level warehouses. The rest of the payment is transferred after the district agricultural officers inspect the stocks. From the warehouses, the fertilisers are transported to retail shops where farmers buy them at government controlled-prices, which are substantially lower than the price at which the companies sold them to the government.

A fertiliser shop in Krishna district of Andhra Pradesh. Photo by Kumar Sambhav
A fertiliser shop in Krishna district of Andhra Pradesh. Photo by Kumar Sambhav

The system looks good on paper but does not work on the ground. Almost half of the Rs 70,000 crore annual subsidy goes waste. Fertilisers are diverted to industries such as plywood and paint manufacturers that use similar chemicals in their manufacturing processes. Consignments are also illegally exported across the border to Bangladesh and Nepal, where urea is far more expensive. The pilferage results in 51% of all farmers buying urea above the maximum retail price, the Economic Survey 2015-’16 found.

Even the fertiliser companies complain of delayed payments. Between 2012 and 2015, the government owed the companies more than Rs 30,000 crore, claimed the Fertiliser Association of India. This forced the companies to borrow from banks and pay an estimated interest of around Rs 3,500 crore, corroding their profitability.

Besides, the overuse of cheap fertilisers has undermined farm productivity in many parts of India.

Reforming the supply chain

In 2007, the Congress-led UPA government took the first shot at reforming the supply chain. It rolled out the Fertiliser Monitoring System – an online tracking system that made it compulsory for manufacturing companies to upload data showing sales made to wholesalers. This helped track the availability of fertilisers in a district.

Then, in November 2012, the government launched the mobile-based Fertiliser Management System, which brought retailers into the fold. They were required to send updates by text messages to confirm the receipt of fertilisers from wholesalers. Fertiliser companies received their payments from the government on the basis of these text messages.

In 2013, a task force recommended that fertilisers sales from retailers to farmers also be mapped. Once this was done, the government would be able to transfer the subsidy payment from the companies to the farmers in three phases: first, from the manufacturer to the wholesaler; second, from the wholesaler to the retailer; third, from the retailer to the farmer. The ultimate goal was that farmers buy fertilisers from retailers at market prices and are subsequently paid the subsidy by the government directly into their bank accounts – Direct Benefit Transfers, or DBTs as the government called it. But in 2013, the government decided to abandon the idea of cash transfers to farmers because it concluded identifying beneficiary farmers was too complicated.

In 2014, Prime Minister Narendra Modi was sworn into power. Putting aside his earlier opposition to Aadhaar, his government came up with ambitious plans for an Aadhaar-enabled Fertiliser Distribution System. Individual farmers would be identified using their Aadhaar numbers before fertilisers were sold to them. Success in identifying farmers could pave the way for cash transfers in the future.

Krishna and West Godavari districts in Andhra Pradesh were selected for the first pilot projects, which began in June 2016. Seventeen districts around the country were added in October 2016.

How it worked on the ground

Soon after the pilot project began, Rao, who lives in Gopadu village in Krishna district of Andhra Pradesh, visited the fertiliser seller in his area to buy urea. The retailer used the machine to verify Rao’s identity against his Aadhaar card and check his land ownership record and his soil health card. The machine instructed the retailer to sell him only 700 kg of urea for his paddy crop. But Rao demanded 1,500 kg of urea. He would not let a machine overrule his decades of experience as a farmer. “Who will be responsible for the loss if we get poor yield by using less fertilisers?” he asked. The retailer ignored the machine and sold him 1,500 kg. The machine was not going to deter the retailer from doing business.

Thousands of farmers and dozens of fertiliser retailers in Krishna and West Godavari district did the same – they ignored the machine’s instructions. “We could not deny what farmers asked for,” explained a fertiliser dealer in G Kundur, a block centre in Krishna. “There would have been riots. Our business would have suffered.”

Farmer Babu Rao of Gopadu village in Krishna, Andhra Pradesh, admits the soil in his farms might be becoming infertile due to excessive usage of chemical fertilisers but says he would not trust the recommendations of fertiliser usage in the soil health cards. Photo by Kumar Sambhav
Farmer Babu Rao of Gopadu village in Krishna, Andhra Pradesh, admits the soil in his farms might be becoming infertile due to excessive usage of chemical fertilisers but says he would not trust the recommendations of fertiliser usage in the soil health cards. Photo by Kumar Sambhav

In October, the point of sale machines stopped instructing retailers on how much fertiliser to sell to a farmer. The machines also stopped confirming if a person was actually a farmer with a piece of land or not. This did not bother retailers or farmers. Now farmers were free to buy the amount of fertilisers they wanted without any conditions imposed by the machines.

Some district level officials dismissed this as a glitch in the machines. “We thought it was a technical problem,” said a technical officer associated with the implementation of scheme in Krishna. “We complained to authorities a few months ago but never got a response.”

What the district officials did not know was that two of the three pillars of the government’s radical fertiliser subsidy reforms had collapsed in the face of ground realities. A study of the initial phase of the pilot project done by the consultancy firm MicroSave for NITI Aayog, the central government’s think-tank, found the “coordination with three different kind of databases (land record, soil health card, and Aadhaar)” was causing “high transaction time” because of “incomplete digitisation of land and soil health card databases”. The study noted the process had to be simplified by removing the necessity of checking the farmer’s digitised land records and soil health cards.

What the government did next

In October 2016, the government quietly delinked the fertiliser subsidy scheme from the two databases – land records and soil health cards. This was done “to ensure genuine beneficiaries were not left out due to any technical lapses”, said a researcher who worked with the NITI Aayog on the scheme.

This meant the government could no longer detect whether the person asking for fertilisers was a farmer. Nor could it rationalise the amount of fertilisers sold to him. This left the last mile of fertiliser delivery open to pilferage again.

With the collapse of two pillars of the fertiliser subsidy reforms, the government rested its hopes on the third pillar – the identification of the customer through the Aadhaar database.

Even this would be tested against ground realities in the next 17 districts where the government introduced the scheme in October. The realities would prove harsher than what the government had factored into the plans it had drawn in Delhi, resulting in the delay of the nationwide rollout of the scheme by six months.

When the scheme is implemented across the entire country, it will be done without the linkage to digitised land records and soil health cards. The government says that will happen eventually but no date has been set.

The next part of this series looks at why the land records database – one of the three foundation pillars for the proposed fertiliser subsidy reforms – failed to work.

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