---------------------------♦----------------------------- INTRODUCTION

It is a matter of time when it is either completely withdrawn or its present shape goes under transformation much under budgetary pressure rather than the WTO obligations. The subsidy withdrawal will have many ramifications. It will impact GDP both on supply and demand side besides denting farmer’s purchasing power and food security in terms of physical availability. This paper will analyze the effect of subsidy withdrawal and experience of a few countries about subsidy elimination on the basis of selected studies.

It can be observed from the above table that the country is almost self-sufficient in nitrogenous production due to affluence of natural resource, but same is not true for phosphatic fertilizers as it is heavily dependent on imported raw materials for production of DAP and other NP complex fertilizers. In case of withdrawal of fertilizers subsidy, the N & P products have to be produced and sold at ruling world prices. Consequently, the invisible market hand in open economy will eliminate inefficient fertilizer producers. Thus once fertilizers prices are decontrolled, domestic prices may become equal to world prices. In that scenario, domestic supply-price relation is to be seen in global perspective, as explained graphically in Figure: 3.

Figure: 3 above illustrates that home prices (Hp) are below the world prices (Wp), due to MRP fixation by the government, and consequently differential between the production/import cost and MRP of the three major fertilizers is reimbursed as subsidy by the government of India. Once the sale prices of these fertilizers are decontrolled and the market forces determine the sale price, home prices will become equal to world prices. In that case, only competitive domestic producers will remain in production and rest will vanish. This reduction in domestic production of fertilizers may reduce the domestic supply and in will create space for imported fertilizers, the volume of which may be contingent on import prices determined by the demand and supply at international market. To assess the production loss of N &P, one needs to look at the unit wise cost of production in the country.

2

It is observed from the above table that urea plants, as per NFPP, are grouped in different categories as per the vintage and feed stock used for the production. Since there is no homogeneity in the feedstock, there is a wide gap in cost of production ranging form Rs.4866 (KRIBHCO) to Rs.21903/ (MFL-Manali) per tonne of urea. It is noticed that most of the Naphtha based units are having cost over Rs.15000 due to high priced naphtha. If commercial viability of different urea plants is examined in the light of their production cost, it is seen that all the Gas, mixed feed and Fuel oil/LSH based urea units are economically efficient in the given international market scenario and most of the Naphtha plants are inefficient, being non-competitive at prevailing import parity price Rs.15000 per tonne of urea. These inefficient plants may get closed down. Thus urea production capacity of about 33 lakhs tonnes (20%) of total 200 lakhs tonnes may get eliminated for the time being. However, it is possible that actual production loss may be less due to rising trajectory of prices in international market on account of increased demand. Although loss in production can be more if imported urea price gets depressed at international market due to conspicuous fall in demand. Indian phosphatic fertilizer production is either based on imported phosphoric acid or imported rocks and Ammonia. These inputs contribute about 92% of the total cost of production and balance 8% remains conversion cost. So domestic cost could match with the landed cost of imported DAP and consequently subsidy withdrawal may not have very injurious effect on production of this segment of fertilizers on contribution of Chemical Industry to GDP.

It is observed from the Table 8 above that GDP growth (68.8%) in last five years has been twice that (32.3%) of value of agriculture. The inputs value has taken over the outputs by over 6%. It is also noticed that contribution of organized Chemical Industry to input value has come down from 17.9% in 2000-01 to 13.7% in 2005-06 and same is reflected in falling contribution to GDP from 1% in 2000-01 to 0.67% in 2005-06. It means the value of other inputs has gone up compared to chemical fertilizers, besides farmers are more relying on usage of organic fertilizers, which has registered the growth of 9.8% compared to 5.4% of Chemical fertilizers. If it is assumed that in short term, urea production of 33.02 lakhs tonnes from Naphtha based units, having production cost over Rs.15000 per tonne, may wither away; consequently the estimated loss might be of Rs.1594 crores at prevailing MRP of Rs.4830/ per ton of urea. Thus loss of chemical industry’s contribution to GDP will be very nominal. The losses may get further reduced if some of the Naphtha and LSHS plants convert to Gas route or may not go out of production immediately due to temporary surge in prices of imported Urea. However, in long run, the distinct structural difference between the three main plant nutrients will, by and large, determine the fertilizer supply in the world market. Whereas nitrogen fertilizers are being produced in some 90 countries around the world, production of phosphates and to even larger extent of potash is much more concentrated in countries having mineral deposits. Three countries, USA, China and Morocco, account for almost 2/3 of the world supply of phosphate rock, while Canada and CIS alone provide 2/3 of the world potash supply. No one company or country has such a dominating position in the nitrogen industry. While the discovery of new reservoirs of natural gas in numerous developing countries has led to a dispersion of nitrogen production to countries which previously had none at all, phosphate and potash

have not taken their share of the production capacity build up as one might have expected given their comparative advantage (Eilertsen, 99). It is assumed that once world prices start increasing and this industry is seen as a profit-making venture, new investments may take place in resource rich areas of Middle East and Latin America, which may drive down the world prices further by improving the supply. Similarly, removal of price cap on DAP and MOP may sensitize potassic and phosphatic nutrients producers to consumers’ natural resistance to price increase. High prices may result in loss of demand and market share, which in turn may force the producers to reduce the prices for retaining their market share. They may keep the prices within the range of their marginal utility value and so supply of these products should not be a constraint.

The utility of chemical fertilizers in fostering farm production and productivity cannot be undermined. Nevertheless, chemical properties of the three major fertilizers i.e. Urea, DAP, and MOP differs and so does their contribution. Owing to its growth-promotional effects, explained by its physiological functions, nitrogen is often used in excess of its requirement and not balanced with other nutrients. Therefore this nutrient, though having a positive impact on nutritional value, e.g. protein content of cereals etc. is often associated with poor crop quality. In contrast to nitrogen, potassium owing to its specific functions in plant metabolism has the potential to improve quality of crops. Quantitatively these two nutrients play major role in growth and yield formation of crops (Hardter, Kali et all,99). Similarly phosphate contributes in strengthening roots and productivity of root based crops like potato. To assess the impact of subsidy withdrawal on demand of these fertilizers, it is necessary to refer the current selling prices of these fertilizers and likely price increase due to subsidy-withdrawal. The present maximum retail prices of Urea, DAP and MOP are Rs4830/, Rs. 9350/ and Rs4455/ per tonne respectively and average subsidy on these fertilizers is Rs. 9427/per tone on Urea, Rs. 7292/ per tonne indigenous DAP/ Rs. 6308/ per tonne imported DAP, and Rs.7153/ per tonne MOP. It is obvious that subsidy withdrawal, in short run, will result in price increase, not necessarily equivalent to subsidy loss, in given fertilizer demand elasticity. In case of Urea, price rise may be intense due to sudden loss of domestic production by about 20%. This may create huge supply pressure at world market and consequent spiral effect on price. Besides, it will get compounded with port handling and other logistic cost. The natural trajectory will be contingent on factors like investment in fertilizers sector, development of irrigation infrastructure, solving the problem of timely availability of quality fertilizers, credit (Nagy & Edun, 2002) and market realization of the farm produce. In short run, the extent of demand loss can be assessed in the backdrop of historical trend in fertilizer prices and consumption. In Seventies, the average price of per kilogram of N was Rs.3.36 and that of ‘P’ was Rs.3.48 with nutrient cost ratio of 0.9:1.1 with average value of ratio as 1.02. Both ‘N’ and ‘P’ consumption registered a growth of 11%, i.e., N and P moved together. But in Eighties, the average cost ratio of N and P was in the range of 1.13 to 1.1, with average value of ratio as 1.15 because prices moved to Rs.5.07 per kg. of N and to Rs.5.86 per kg of P. However, in this period ‘P’ registered higher growth of 15% as compared to 9.8% growth of N on average annual basis. In the period of decontrol in early Nineties, the ratio of ‘P’ to N became 2 to 2.6 and then in 1996-97 came down to 2.14( Banga, 2004).

4

The scenario between 1992-93 and 1996-97 indicates that the incremental growth of ‘N’ has been normal and not exceptional. It does not indicate that the farmers by virtue of ignorance substituted ‘N’ with ‘P’. The maximum price sensitivity even with decontrolled prices of ‘P’ was about15%, which was a shock response and the same was made up very shortly with recovery of 8.2% on incremental year-to-year basis in the year 1994-95. Once the concession amount was increased in the year 1997-98, again there was instant response with 31% and 33% incremental increase in ‘P’ and ‘K’ respectively (Banga, 2004).

If above is taken as a pointer to foretell the demand pattern resulting from complete subsidy-withdrawal, consumption of Urea may suffer by 15-20% but that of phosphatic and potassic may get real hit in short run by about 25-30% of P & 35-40% of K; because of farmers’ preference to Urea over DAP & MOP on account of yield and vegetative growth prospects. Since use of MOP is more associated with quality rather than yield, its consumption may be the biggest causality. However, if subsidy is withdrawn in a phased manner and prices are increased as per recommendation of the Economic Reform Commission, the consumption of Urea may not have serious set back.

1. Agreement on Agriculture, World Trade Organization: The legal Texts, The Results of the Uruguay Round of Multilateral Trade Negotiations, Cambridge University Press. 2. Agreement on Government Procurement, World Trade Organization: The legal Texts, The Results of the Uruguay Round of 3. Agreement on Subsidies and Countervailing Measures, World Trade Organization: The Legal Texts-The Results of the Uruguay Round of Multilateral Trade Negotiations, Cambridge University Press. 4. Agreement on Trade- Related Measures, World Trade Organization: The Results of the Uruguay Round of Multilateral Trade Negotiations, Cambridge University Press. 5. Agricultural Statistics At A Glance 2005, Directorate of Economics & Statistics (Agricultural Statistics Division) Department of Agriculture & Cooperation, Ministry of Agriculture, Government of India. 6. Agriculture Statistics at a Glance, 2002-03: Directorate of Economics & Statistics, Ministry of Agriculture, Government of India. 7. Annual Report 2004-05, Government of India, Ministry of Chemical & Fertilizers, Department of Fertilizers, Delhi. 8. Annual Report 2006-07, Government of India, Ministry of Chemical & Fertilizers, Department of Fertilizers, Delhi. 9. Appellate Body Report on Canada-Measures Affecting the Export of Civililian Aircraft, WT/DS70/AB/R 2 August 1999. www.wto.org, accessed on 5-8-2004. 10. Appellate Body Report on Brazil - Export Financing Programme for Aircraft (WT/DS46/AB/R) 2 August 1999, Dispute Settlement Commentary (DSC), WorldTradeLaw.net LLC, accessed on 14.12.2004. 11. Appellate Body Report, United States - Final Countervailing Duty Determination With Respect To Certain Softwood Lumber From Canada,(WT/DS257/AB/R), Dispute Settlement Commentary (DSC), WorldTradeLaw.net LLC, accessed on 15.1.2005. 12. Appellate Body Report on India-Quantitative Restrictions On Imports Of Agricultural, Textile and Industrial Products, WT/DS90/AB/R 23 August 1999,www.wto.org, accessed on 12.7.2004. 13. Appellate Body Report on Canada-Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R & WT/DS142/AB/R 31 May

14. Appellate Body Report on United States-Imposition of Countervailing Duties On Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating In The United Kingdom, WT/DS138/AB/R 10 May 2000, www.wto.org, accessed on 1.7.2004. 15. Appellate Body Report on Canada-Measures Affecting the Importation Of milk and The Exportation Of The Dairy Products –Recourse To Article 21.5 of The DSU by new Zealand and United States, WT/DS103/AB/RW & WT/DS113/AB/RW 3 December 2001,www.wto.org, accessed on 2.7.2004. 16. Appellate Body Report on United States-tax Treatment for “ Foreign Sales Corporations” WT/DS108/AB/RW, 24 February 2000, www.wto.org accessed on 1.7.2004. 17. Appellate Body Report on United States-tax Treatment for “ Foreign Sales Corporations” Recourse To Article 21.5 Of The DSU By The European Communities, WT/DS108/AB/RW, 14 January 2002, www.wto.org accessed on 1.7.2004. 18. Appellate Body Report on United States-Countervailing Duties On certain Corrosion-Resistant Steel Flat Products From Germany, WT/DS213/AB/R 28 November 2002, www.wto.org, accessed on 12.12.2004. 19. Appellate Body Report of EC-banana III. WTO analytical index: SUBSIDIES & COUNTERVAILING MEASURES, Agreement on Subsidies and Countervailing Measures, www.wto.org, accessed on 15.1.2005. 20. Appellate Body Report of Indonesia – Autos. WTO analytical index: SUBSIDIES & COUNTERVAILING MEASURES, Agreement on Subsidies and Countervailing Measures, www.wto.org, accessed on 15.1.2005.

22. Awasthi U.S.: Impact Of The Policy On The Health Of Urea Industry, ‘Fertilizers And Agriculture’ F.A.I. Seminar December 2002, New Delhi. of India, 2004. 24. Bhatt, D.K. Impact of New Policy Regime Especially Movement Decontrol On Fertilizer Marketing, presented in FAI Seminar, 4-6 December, 2003, New Delhi. 25. Carney D, Editor, ODI Series, ‘Fertilizer Supply’, Department for International Development, Rural Livelihoods Department, November 1997. 26. Chandhoke N. Priyadarshi P, “Electoral Politics in Post-Conflict Societies: Case of Haryana”, Economic and Political Weekly, March 4-10, 2006. 27. Chand R, “Emerging Crisis in Haryana Agriculture: Severity and Options for Future”, Economic and Political Weekly, Special Issue on Agriculture, March 27, 1999. 28. Chandra S, “Fertilizer Demand –Supply Management- A Holistic View”, Fertilizer News, July 2002, Vol.46 (7). 29. Chandra S, “Dynamics of New Pricing Policy for Urea in WTO perspective”, Fertilizer Marketing News, June 2003, No.6. 30. Chandra S, “Reforming the Land Reform” Business Standrad, Kolcatta, 25th March 2005. 31. Chandra S. & Sinha N, “Fertilizer Subsidy-A WTO Compatible Approach” Indian fertilizer Journal, July 2007, FAI, New Delhi. 32. ‘Concession Scheme’ for extending financial supports to decontrolled fertilizers P&K on sale w.e.f. 1.10.2000. -Annual Report 2003-04, GOI, DOF, Ministry of Chemical and Fertilizers. 33. Cuppett B. S, Case Study on WTO Dispute Settlement: European Communities-Hormones, Complaint by the United States, 2001. 34. Desai B. H, Theoretical And Policy Making Contributions of Research on Agricultural Economics: A Success or Failure or Neither? Indian Economy in the New Millennium, Himalayan Publishing House, Mumbai, 1999.

6

of Indian, New Delhi. 36. Dubey M, “An Unequal Treaty: World Trading Order After GATT” New Age International Limited Publishers, New Delhi, 1999. 37. Erdogan G. F. U., “Turkish Membership in the European Union: Challenges and opportunities for the Agriculture Sector”, International Trade and Finance Association 15th International Conference, Ankara University, School of Agriculture, Department of Agricultural Economics, 18 May 2005, (http://services.bepress.com/itfa/15th/art11), accessed 1.7.2006. 38. Essential commodities Act, 1955, The Fertilizer Association of India, New Delhi. 39. Fertilizer (Control) order 1985, Gazette Notification orders No. GSR 758 (E) dated 25th September 1985. The Fertilizer Association of India, New Delhi. 40. Fertilizer (Movement control) order, 1973 Gazette Notification No. SRO 249(E) dated 25th April1973, The Fertilizer Association of India, New Delhi. 41. Fertilizer (Movement control) order, 1973 Gazette Notification No. SRO 249(E) dated 25th April1973, The Fertilizer Association of India, New Delhi. 42. Fertilizer Statistics 2005-06,Fertilizer Association Of India (FAI), New Delhi. 43. Fertilizers Situation- ‘India-Policy Changes In the Hydrocarbon Sector’, Fertilizers News December 2001, F.A.I., New Delhi. 44. FICC/CE/72-2003/164 dated 28-5-2003. Notification issued by the FICC, Department of Fertilizers, GOI, New Delhi. 45. Final Act Embodying The Result Of The Uruguay Round Of Multilateral Trade Negotiations, The legal Texts, The Results of the Uruguay Round Of Multilateral Trade Negotiations, Cambridge University press. 46. Gazette Notification No. S.O. 477 (E), Ministry of Industry, Department of Industrial Development dated 24th July 1991. 47. Gazettes Notification No. S.O.642 (E) dated 25.08.1992 regarding decontrol of potassic and phosphoric fertilizers, issued by the 48. General Agreement on Tariff and Trade 1994, The World Trade organization. The legal Texts, The Results of the Uruguay Round of Multilateral Trade Negotiations. Cambridge University press. 49. Ghuman, “Implications of WTO regime: Challenges before Haryana Agriculture”, The Tribune, Chandigarh, June 19, 2000. 50. Goyal A. & Mohd. N, -WTO in the new Millennium, 5th Edition: September 2001, Academy of Business Studies, Sheeltara House, New Delhi. 51. Government of India, Ministry of Chemical & Fertilizers, Department of Fertilizers, letter No.12019/5/98-FPP dated January 30, 2003. 52. Gupta U, “Fertilizer Subsidy: The Inevitable Monster: Concept Agrotech Consultants Limited, New Delhi publication.1999. 53. Hardter R.K, Salz G,G. and Kali K. International Potash Institute ( IPI), Basel, Switzerland, “BALACNCED FERTILIZTION AND CROP QUALITY”, IFA Agricultural Conference On Managing Plant Nutrient, 29 June-2 July 1999, Barcelona, Spain. 54. Hussain A, “Poverty, Growth and Governance in South Asia”, published as a Paper in the book: V.A. Panandiker (ed.): Problems of Governance in South Asia, Konark, New Delhi, 2000. 55. Hussain A, Agriculture Growth and Employment in Pakistan’s Rural Sector: Policies for Institutional Change: ILO, Mimeo, March 1999. 56. Landes M, Govindan A, “Indian Agriculture: Status and Reform Potential” approved by Chad R. Russell, U. S. Embassy, New Delhi, a voluntary Report-public distribution, dated 8/19/2004.GAIN Report Number: IN4089. 57. Letter No. 4-20/78-FDO-1 dated 1.1.1979-E.equated Freight, Department Of Agriculture and Cooperation, Government Of India. 58. Koul. A.K. - The Legal Regime of Subsidies and Countervailing Measures in World Trade Organization (WTO)- Delhi Law Review-Volume XXI: 1999.

60. Markesh Agreement Establishing the World Trade organization. The legal Texts, The Results of the Uruguay Round Of Multilateral Trade Negotiations, Cambridge University press. 61. Murshid K.A.S, Research Director, BIDS, “Implication of Agricultural policy Reforms on Rural Food Security and Poverty”. 2004. 62. Ministry of Chemical & Fertilizers, Department of Fertilizers letter No.18-1/2000-FM dated 15.03.2000 on violation of Movement orders. 63. Mishra S,“Modern economic Growth and Distribution” Head of the Dept of Economics, B J College, Cuttack, India.,2004. 64. Nagy J.G. & Edun O, Consultants to IFDC, “Assessment of Nigerian Government Fertilizer Policy and Suggested Alternative Market-Friendly Policies”, September 2002 65. National Accounts Statistics, Central Statistical Organization, Ministry of Statistics & Programme Evaluation, Government of India, 2006-07. 66. No.2 (RE-2001) 1997-2002 dated 31st March 2001, Serial No.166 Exim Circular No. 310-210-PO, Subject to Para 4.8 of Exim Policy, Ministry of Commerce & Industry, Government of India. 67. Notification No. S-5/2004-Shiping II dated 30-8-04 issued by the Department of Fertilizers, Ministry of Chemical and Fertilizers, GOI. 68. Notification No.12019/11/2003-FPP dated 29-1-04, Department of the Fertilizers, GOI. 69. Notification No.30 (RE-2003/2003-2007, New Delhi dated 28th January 2004, Department of the Fertilizers, Ministry of Chemical and Fertilizers, GOI. 70. Notification of Public Notice No.2 (RE-2003) 2002-03 dated 31st March'03, Ministry of Commerce & Industry, Government of India 71. Ole J. E., “GLOBALIZATION AND ITS IMPACT ON THE FERTILIZER INDUSTRY” Norsk Hydro ASA, Norway. and Boston: Kluwer Law International, 1999. 73. Panel Report on Indonesia- Certain measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, 2 July 1998,www.wto.org accessed on 2.7.2004. 74. Panel Report on Brazil-Export Financing Programme For Aircraft, WT/DS46/R 14 April 1999, www.wto.org, accessed on 10.9.2004. 75. Panel Report of Canada - Measures Affecting the Export of Civilian Aircraft (WT/DS70/R), 14 April 1999, Dispute Settlement Commentary (DSC), WorldTradeLaw.net LLC, accessed on 7.8.2004 76. Panel Report of Australia - Subsidies Provided to Producers and Exporters of Automotive Leather,(WT/DS126/R), 25 May 1999,Dispute Settlement Commentary (DSC), WorldTradeLaw.net LLC, accessed on12.11.2004. 77. Panel Report on United States-Measures Treating Export Measures as Subsidies, WT/DS194/R 29 June 2001, www.wto.org, accessed on 2.11.2004. 78. Panel Report on United States-Preliminary Determinations With respect to Certain Softwood Lumber from Canada, WT/DS236/R 27 September 2002,www.wto.org, accessed on 2.8.2004. 79. Panel Report on Korea - Measures Affecting Government Procurement (WT/DS163/R), Dispute Settlement Commentary (DSC), WorldTradeLaw.net LLC, accessed on12.12.2004. 80. Krugman P. R, Maurice O, “International Economics- Theory and Policy”, Fifth Edition, Addison-Welsley Longman, 2003. 81. RAO C. H.H, Fertilizer Pricing Policy, Report of the High Powered Review Committee, April 1998, Department Of Fertilizers, Government of India. 82. Report of Economic Reform Commission, Ministry of Finance, Government of India, New Delhi, September 2000.

8

Fertilizers, Government of India. 84. Report of the Joint Committee on Pricing, Tenth Lok Shabha (1992): Government of India.