Explained: Why did the Modi government increase the DAP grant?

Faced with a possible resumption of protests by farmers – this time over fertilizer prices – the Narendra Modi government on Wednesday announced a 140% increase in the diammonium phosphate subsidy (DAP), from Rs 511 to Rs 1,200 per 50 kg bag. What were the economic and political constraints behind the government’s decision, which is estimated to cost the treasury an additional 14,775 crore rupees for the next kharif season alone?

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What is DAP and why is it important for farmers?

DAP is the second most widely used fertilizer in India after urea. Farmers normally apply this fertilizer just before or at the start of planting, as it is rich in phosphorus which stimulates root development. Without well-developed roots, plants will either not reach their normal size or take too long to mature.

While there are other phosphate fertilizers as well – for example, a unique super phosphate containing 16% P and 11% sulfur (S) – DAP is the preferred source of P for farmers. This is similar to urea, which is their preferred nitrogen fertilizer containing 46% N.

What is the DAP subsidy scheme and how is it different from other fertilizers?

The maximum retail price (MRP) for urea is currently set at 5,378 rupees per tonne or 242 rupees for a 45 kg bag. Since companies are required to sell at this rate, the subsidy (the difference between the cost of manufacturing or importing and the fixed MRP) is variable.

The PRMs of all other fertilizers, on the other hand, are uncontrolled. Technically, companies can sell these products at prices they – not the government – decide. The government only gives a fixed subsidy per tonne. In other words, the subsidy is fixed, but the MRP is variable.

But do all non-urea fertilizers get the same subsidy?

No, they are governed by what is called a nutrient-based subsidy or NBS. For 2020-2021, the Center set the NBS rates at Rs 18,789 / kg for N, Rs 14,888 / kg for P, Rs 10,116 / kg for potassium (K) and Rs 2.374 / kg for S.

Therefore, depending on the nutrient content of different fertilizers, the subsidy per tonne also varies. Since one tonne of DAP contains 460 kg (46%) of P and 180 kg (18%) of N, the subsidy amounts to Rs 6,848.48 plus Rs 3,382.02, or Rs 10,231. the subsidy on muriate of potash (60% K) is 6,070 rupees per tonne, while it is 2,643 rupees / tonne for the SSP and 8,380 rupees / tonne for the popular NPK fertilizer “10:26 : 26 ”.

As previously reported, the DAP grant for 2020-2021 was Rs 10,231 per tonne, or Rs 511.50 for a 50 kg bag. Most companies, until recently, sold DAP to farmers at around Rs 24,000 per tonne or Rs 1,200 / bag. They could do this when international prices – both of the final product and of imported raw materials / ingredients such as rock phosphate, sulfur, phosphoric acid and ammonia – were at reasonable levels.

Landed prices for DAP in India were below $ 400 per tonne or Rs 29,000 until October. Adding 5% tariffs and an additional 3,000 rupees for port handling, bagging, warehousing, interest, trade margins and other costs brought it to around 33,500 rupees per tonne. By deducting the subsidy of Rs 10,231 per tonne, the companies could succeed in selling to the MRP either Rs 24,000 / t or Rs 1,200 / bag.

But global fertilizer and input prices have surged over the past 6-7 months, following a general uptrend in commodities. Since October, the average import prices (CFR) of DAP have fallen from $ 395 to $ 570 / tonne, while going from $ 275 to $ 365 for urea, $ 230 to $ 280 for MOP, 280 $ to $ 550 for ammonia and $ 85 to $ 210 for sulfur. . This prevented companies from continuing to sell at the old rates.

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So what did they do?

All raised MRP. This included the country’s biggest seller, Indian Farmers Fertilizer Cooperative (Iffco), which announced an increase in its MRP from DAP from Rs 1,200 to Rs 1,900 / bag, while doing the same for 10:26:26 (Rs 1,175 at Rs 1,775 / bag), 12:32:16 (Rs 1,185 to Rs 1,800 / bag), and 20: 20: 0: 13 NPKS (Rs 925 to Rs 1,350 / bag).

These increases were effective from April 1. Since non-urea fertilizers are technically controlled, nothing has stopped them from undertaking such price increases. But with the West Bengal Assembly elections still ongoing, businesses have been urged to keep them on hold. Iffco, for his part, said the highest MRPs would only be for newly produced / imported fertilizers. Old stocks would continue to be sold at past rates.

And what happened later?

As the old stocks started to run out, companies started selling the new material at higher rates. With April being a lean month for fertilizer sales, the magnitude of the price increase was not really apparent to anyone, including farmers. It was when purchases started to increase from the second week of this month – before the kharif planting season – that all hell broke loose.

The emphasis is naturally on the DAP; having to pay 58% more – an extra Rs 700 / bag on top of Rs 15 / liter for diesel over the past year – was obviously too much. Companies could also not force the government not to increase MRP beyond a certain point.

What has the government done now?

The fertilizer department had notified NBS rates for 2021-22 on April 9. These have remained unchanged from last year’s levels, leaving companies with little choice but to go ahead with the MRP hikes.

But on Wednesday Prime Minister Narendra Modi chaired a meeting where he was given a detailed presentation on global fertilizer price movements. As a result of the meeting, a “historic decision” was made to increase the DAP subsidy from Rs 10,231 per tonne (Rs 511.55 / bag) to Rs 24,231 per tonne (1,211.55 / bag) .

The Fertilizers Department also notified a higher NBS rate for P (from Rs 14,888 to Rs 45,323 / kg), while keeping those for the other three nutrients (N, K and S) unchanged. This will allow companies to sell DAP to the previous MRP, but not MOP and other complex fertilizers.

But the opportune time to at least control DAP prices is good, as farmers will start planting from next month with the onset of the southwest monsoon rains. Politically, too, a resumption of farmer protests, even more so in the days of the second wave of Covid, is the last thing the government would want.

About Christopher Easley

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