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Indian Economic Policy

Notes (iv) FCI should include a greater number of states in their price-support operations.
(v) In order to enforce efficiency, the reimbursement to FCI should be on the basis of normative
unit costs and actually involved quantity, instead of reimbursement on actual basis.
(vi) To improve PDS penetration and reduce leakages, the Government can introduce the system of
food coupons for the poor. A uniform PDS price will be fixed for APL and BPL facilities, but the
poor can buy foodgrains partly with coupons and partly with cash. Since the poor cannot afford
monthly procurement of foodgrains in one go, the PDS purchases should be allowed only on a
weekly basis. Restricting monthly bulk purchases at PDS will discourage the not-so-needy from
PDS outlets. This will help self-targeting of PDS.
All these measures appear to be good intentioned. But the major problem relates to their
implementation. It is said that habits die hard and hardened habits are still difficult to break. For all
these years, the State has been succumbing to farm lobby pressures, thereby responding by raising
the minimum support price as also undertaking unlimited procurement. With limiting PDS operations
to only five states, a huge buffer stock surplus was created which the state frittered away in exports
at nearly BPL prices. Now on the one hand, a proposal is made to extend procurement to more states,
and on the other, to limit procurement to the procurement target fixed in the beginning of the
agricultural season, appears to be a non-feasible proposition. It would have been better if the present
practice of procuring foodgrains by FCI had been continued and the Government should resist further
increase in MSP beyond the increase in CPIAL. At the same time, the surplus in FCI godowns should
be used to guarantee employment to all unemployed by extending the provisions of the Employment
Guarantee Act. Wages can be paid partly in cash and partly in kind - foodgrains. This will be a more
practical way of converting food subsidy into employment. The Government will earn the goodwill
of farmers as well as unemployed-landless labourers, marginal farmers, and other semi-literates in
rural areas.
Fertilizer Subsidy
Fertilizer subsidy which was ` 6,735 crores in 1995-96 shot up to Rs, 13,800 crores in 2000-01- more
than double the level during the five year period. There after, it slightly declined and was around `
12,000 crores in 2003-04. As a proportion of GDP, fertilizer subsidy which was only 0.23 percent in
the early- 1980s increased to a peak of 0.93 percent in 1989-90 and thereafter, it started to decline. It
was barely 0.53 percent in 1993-94. In the subsequent period, reversal of trend occurred, it reached a
level of 0.68 percent in 1999-00, but had declined since then to an estimated level of 0.43 percent in
2003-04. In 2010-11 (BE) fertilizer subsidy has been kept at ` 49,981 crores.
Fertilizer subsidy is the difference between the retention price of fertilizers and the price at which
fertilizers are made available to consumers. The difference is paid to industry as subsidy. A serious
attempt was made by the Government to reform the Retention Price Scheme (RPS) so as to rationalize
fertilizer subsidies. Government decontrolled the import of phosphorus and potassium fertilizers
and provided a flat-rate concession on their imports. But urea imports continued to be restricted and
canalized. In 2000, on the recommendation of Expenditure Reform Commission (ERC) a group-
concession rate scheme was introduced on l April 2000. ERC recommended phasing out of the unit-
st
wise RPS in stages over a period of six years.
Studies have revealed that overall, for the entire period of 1981-82 to 2002-03, the average share of
farmers in fertilizer subsidy was 62 percent and that of industry was 38 percent. Any scheme of
rationalization of fertilizer subsidy depends on two factors : (i) efficiency of domestic fertilizer industry
and the domestic cost of production, and (ii) the international price of urea. In the event of opening
up of fertilizer sector imports, the gas-based plants would survive, whereas others, particularly
naphtha-based plants, would not. This is due to the fact that naphtha or fuel oil or low sulphur
feedstock is more costly as a raw material than natural gas.
The Report suggests that there is a need to reduce the subsidy to farmers as well as industry. In the
short run, the subsidy may be continued. But in the long run, the option of setting up fertilizer plants
in such countries where natural gas is available in plenty may be considered. Secondly, there is a
need to increase the farm-gate price of urea at regular intervals. The Report is of the opinion that the

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