The fertilizer subsidy conundrum

Uncertainty seems to be creeping in again before the budget. This time it is the fertilizer sector, as urea prices and subsidies are being discussed again. Engro Fertilizer’s CEO has reportedly suggested the government to completely do away with sales tax on urea, instead of providing cash subsidy.

The notion goes that zero sales tax on urea will have the same impact on prices that the cash subsidies do. And that this mechanism will work more smoothly and the intended aim of benefiting the farmer will be achieved in a smoother manner. It seems all nice, except for the fact that the numbers do not add up.

Recall that the government had reduced the general sales tax on urea to 5 percent, from 17 percent last year.

There was also an element of cash subsidy to the tune of Rs150 per 50 kg bag. So, if the idea is to remove the cash subsidy element, another Rs70 per bag would be freed, that would still leave room for Rs80 per bag. Annual urea off-take has averaged 5.5 million tons, and that would mean roughly Rs8 billion of additional cost for farmers, should the cash subsidy be withdrawn.

The idea seems to have stemmed primarily from the non clearance of subsidy claims on the government’s end.

The government surely needs to smoothen the subsidy settlement, as urea manufactures also face the issue of clearing excess inventory, which sits over a million tons. That said, merely abolishing GST on urea would not be enough to keep prices at current levels.

Election year or not, the fact of the matter remains that the local farmer is at a disadvantage in terms of farm cost, when compared to the region. Farmers must continue to get urea at subsidized rates. Also, a burden of Rs8-10 billion is not really a huge deal in the larger scheme of things.

On the other hand, the FBR might not want GST on fertilizers to be completely taken away, even if the net impact is neutral. In all likelihood, government is likely to continue with subsidy on fertilizers, with or without GST removal.

The need is to streamline the mechanism, so as the farmers and manufactures do not feel the pinch. Much needs to be done to increase the farm yields, which have refused to go up over the past decade. More effort in this regard could yield better results, than merely debating the subsidies.