The Political Economy of Agricultural Policy Reform

CHAPTER 6

The Politics of Fertilizer Supply to Agriculture: Analysis of Political Actors, Discourses, and Strategies

SURUPA GUPTA

his chapter begins by presenting stakeholder positions, as gleaned from interviews (see Table 3.1) and published sources. The literature pre- Tsented in Chapter 2 and the conceptual framework presented in Chapter 3 provided guidance for the data gathering and analysis presented in this chapter. The first section describes the major actors and their interests as well as their political resources and strategies. The second section discusses the role of interests and institutions in fertilizer-sector reform. The third section identifies major discourse coalitions and describes their belief systems and discourses. The fourth section reflects on the extent of policy learning across coalitions. This chapter provides the basis for an analysis of the political feasibility of different reform options and strategies, which is presented in Chapter 7.

Major Actors and Their Interests, Political Resources, and Strategies This section presents the interests, political resources, and strategies associated with the major stakeholders in the reform process. This information is based on interviews with stakeholders and on published accounts of their positions and strategies.

Farmers’ Organizations Analysis of interest articulation in the farm sector in India poses several challenges. First, although agricultural interests are well represented in Parliament—85 percent of the members of Parliament have rural agricultural constituencies—and everyone claims to speak for the farmer and rural India, such claims have not always translated into favorable policies, particularly for the small and marginal farmers who constitute the majority of Indian

58 POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 59 farmers. Agricultural interests are articulated mainly by large farmers, who are generally well represented in all major political parties and therefore in the Lok Sabha, the lower house of the Indian Parliament; accordingly, the interests of medium-sized and large farms are more accurately represented. Second, lobbying efforts by farmers’ interest groups are ad hoc and often poorly coordinated. These organizations include farmers’ unions with local influence, cooperatives, plantation owners’ associations, and commodity- specific groups, many of which have overlapping constituencies. A large number of farmers’ organizations exist, among them All India Kisan Sabha, Bharatiya Kisan Union, Shetkari Sangathana, and Karnataka Rajya Raitha Sangha. Ideologically, these cover the political spectrum from nationalist to liberal to leftist. However, because there is no apex interest group in India comparable to the apex business chambers such as the Confederation of Indian Industries (CII) or the Federation of Indian Chambers of Commerce and Industry (FICCI), their influence is unfocused and limited. At times, national- level policy-coordination bodies, such as the Kisan Coordination Committee and the National Coordination Committee of Farmers’ Movements, have been set up, but these cannot match the focus, continuity of purpose, organization, and resources of their counterparts in industry. Third, although all political parties claim to speak for farmers, particularly small and marginal farmers, this latter group lacks exclusive representation. This is due to the typical collective-action problem: the small and marginal farmers are too numerous and too beset with problems to have the time, information, and organizational ability to come together. Farmers’ groups such as the All India Kisan Sabha and a few other leftist farmers’ groups claim to be the true representatives of small and marginal farmers, but it is difficult to verify their claims. The lack of formal membership lists of farmers’ associations—there is little effort behind regular membership drives—makes it difficult to identify groups that really represent these farmers.1 A number of NGOs also claim to speak for the farmers, but in these cases, too, it is unclear to what extent they represent farmers, particularly small and marginal ones. Finally, policy intervention on behalf of farmers is done primarily by elected political leaders identified with large and medium-sized farmers’ interests. Ajit Singh of Rashtriya Lok Dal (RLD) and Sukhdev Singh Dhindsa of Shiromani Akali Dal (SAD) are two examples. For this project, representatives of the following organizations were interviewed: the national-level Liberal Farmers Movement; Bharat Krishak Samaj, which is associated with the Congress Party; All India Kisan Sabha, the

1Interviews with leaders of several farmers’ associations, New Delhi, June–July 2005 and July– August 2006. 60 CHAPTER 6 farmers’ organization associated with the Communist Party of India—Marxist (CPI-M); and Bharatiya Kisan Union (Tikait). These interviews and written sources presenting the organizations’ positions show clearly that though some farmers’ organizations do support certain reforms, the space for a discourse on liberalizing the agricultural sector and reforming the subsidy schemes is fairly limited. Given the overall problems in the farm sector during the past decade, any suggestion of increasing the farmgate price of urea is seen as antifarmer. Even liberal farmers in India point out that the Indian farmer cannot survive in a world in which developing countries are being asked to liberalize farm trade even as developed countries continue to subsidize their own farm sectors. Some farmers’ groups argue that the government gives them a subsidy only to keep produce prices low. Those in favor of state intervention argue that lower subsidies would have to be associated with higher prices, particularly higher support prices, which would likely increase the price of food and hurt consumers, particularly those who are poor. These farmers also say that they cannot survive if the government withdraws from the market. In fact, faced with the choice between subsidies and larger capital investments by the government in agriculture, most farmers’ groups, predictably, argue that the government should offer both. Although the liberal farmers’ movement has moved away from its demand for free markets, it does advocate weaning farmers off the system of government support prices. Although the rural distress of the past decade suggests that farmers as a group are not as strong as they were in the 1980s and 1990s, no Indian politician can afford to ignore farmers or come across as antifarmer. Farmers’ organizations derive their strength from their large numbers, which translate into votes, and from their capacity to organize large-scale demonstrations in cities. The NDA coalition lost the 2004 national elections in part because it was perceived as antifarmer (Suri 2004). In general, farmers’ groups do not depend on electoral strategies to attain their goals. However, electoral con- siderations do play a role because the central government is usually cautious about adopting policies that would jeopardize the prospects of the ruling party in state-level elections.

Fertilizer Producers Currently, there are 56 large manufacturing units in India that make nitrogenous, phosphatic, and complex fertilizers. Of these, 30 units produce urea, 20 produce DAP and complex fertilizers, and seven units produce low-analysis straight nitrogenous fertilizers. Nine units make ammonium sulfate, and 72 small and medium-sized units produce single superphosphate (DoF 2007, 7). The 30 urea units form the focal point of this analysis. Fourteen are in the private sector, ten in the public sector, and six in the cooperative sector. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 61

The question is whether some among those 30 have a higher interest in influencing the current policy process than others and whether they are, in fact, acting accordingly. Interests of urea-manufacturing units vary according to the feedstocks they use. Because energy costs make up between 60 and 70 percent of the total cost of production, the higher the feedstock price, the higher the cost of production. In general, plants that use natural gas as the feedstock produce urea at the lowest cost. Plants that use naphtha, fuel oil, and other feedstocks have substantially higher costs of production on account of lower efficiency as well as higher supply costs. The vintage of the plant also affects its efficiency. Given that some of the urea plants are in the public sector, it is reasonable to assume that the reform of the government’s policy on urea production has intersected with the general discourse on privatization. It is also likely that, in general, urea plants demonstrate differences in interests based on the feedstock used and the vintage of the plant. Given the small size of the domestic fertilizer industry, it can be expected that interest articulation and advocacy by the industry and its representatives will be focused and effective. The impact of the discourse on privatization on the debate on fertilizer policy is not easily discernible. However, concerns about possible privatization of public-sector units, such as National Fertilizers, may have played a role in the formulation of the NPS. It is also difficult to trace differences in positions according to feedstock use. At times, owners of gas-based plants have asked to be decontrolled. They argue that given the higher import parity price during the past few years, they have been subsidizing the farm sector instead of receiving subsidy. In general, the industry is very organized and articulate in its lobbying efforts and rarely allows internal divisions to surface. The fertilizer industry articulates its interest and lobbies with the government through various channels. First, it has a representative trade body, the FAI, which acts as the industry’s representative on government committees such as the Fertilizer Industry Coordination Committee (FICC) on a regular basis and serves on other committees on an ad hoc basis. The FAI also lobbies with the different ministries involved in developing policy on fertilizers and uses the media extensively to express its position.2 Second, individual owners of firms lobby their cases with specific ministers and ministries. Third and most important, the industry’s interests are the primary concern of the DoF within the MoCF. This is where the fertilizer industry gets most of its

2 Interviews with FAI officials, New Delhi, June–July 2005. 62 CHAPTER 6 institutional power and influence. Finally, there is anecdotal evidence of the industry’s effort at influencing policy through graft—a widespread occurrence in most sectors of the economy. From all accounts, the last factor is crucial in shaping fertilizer policy. However, it is not possible to find hard evidence for the influence of graft. In the absence of such evidence, we have to rely mostly on published evidence of efforts of the FAI to influence policy through its role in the FICC and the DoF as well as through publicity. Interviews with representatives from the industry presented several arguments in favor of continuing subsidies. First, the industry believes itself to be a conduit for the subsidy that the government gives to farmers and consumers and, as such, argues that it is performing a public service. The majority of resource-poor farmers cannot afford urea at either cost or import-parity price, and the subsidy cannot be disbursed to them directly. These farmers are the primary reason why the subsidies are so large. Second, subsidies mitigate the high prices of feedstock that the fertilizer units face. Third, the fertilizer subsidies are small in comparison to the subsidies on water and power given to the farm sector by states, and the central government has focused an unnecessary amount of attention on the fertilizer subsidy. Finally, the industry points out that it is competitive in its use of energy. This claim is based on the findings of the Gokak Committee Report (MoCF 2003, 19–21), which found that the energy-consumption figures of Indian firms compared favorably with those from the United States and China, the world’s other two large urea producers.

Political Parties In India, no political party openly campaigns in favor of discontinuing the subsidy on fertilizer. However, it is possible to detect some variations between the positions of various parties. The positions of national parties are strongly influenced by the politics of their own state-level units as well as that of their coalition partners.

Bharatiya Janata Party (BJP) Although the BJP is one of the main national parties and not primarily an agricultural party, it is obliged, like every party in India with a substantial presence, to take a profarmer stand on agricultural issues. In its 1998 and 1999 manifestos, the BJP and the NDA coalition promised to continue with the subsidy, though in 1999, the NDA manifesto promised to make farm subsidies more direct, efficient, and specific. When it came to power, it promised to move toward decontrol of nitrogenous fertilizers as part of its second-gener- ation reform proposal. Interviews with party representatives suggested that POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 63 the party believes that the industry benefits from the subsidy almost as much as the farmers do. An alternative delivery mechanism needs to be created to provide subsidies directly to the farmers. The BJP is considered to be in favor of liberal economic reform, albeit with nationalist undertones. At the same time, having previously been perceived as antifarmer, the party wants to be careful about its public position on farm sector issues.

Congress Party The Congress Party, another national-level party, was responsible for the initial attempt at fertilizer-sector reform in 1991. At the time of writing, the government in New Delhi is led by the Congress-led United Progressive Alliance. Its policy on subsidies, according to the National Common Minimum Program,3 is to reduce subsidies so as to reduce market distortion on the one hand and protect small and marginal farmers and poor consumers on the other.

Rashtriya Lok Dal (RLD) The RLD mainly represents owners of medium-sized and large farms in west- ern Uttar Pradesh. When the NDA administration was engaged in fertilizer policy reform, the RLD chief, Ajit Singh, was the minister of agriculture. He was also a member of the Group of Ministers responsible for formulating the NPS. He sought to address the difficulties faced by farmers in the form of increased input prices and extremely high levels of indebtedness. In addition, he saw a strong need for reform of the fertilizer industry while realizing that at least 75 percent of fertilizer production had to continue to be domestic, in order to maintain a certain level of self-sufficiency.

Shiromani Akali Dal (SAD) The SAD primarily represents owners of medium-sized and large farms in Punjab. During the NDA administrations, two out of three fertilizer ministers were from SAD. One of them, S. S. Dhindsa, was also a member of the Group of Ministers that formulated the NPS. An interview with a representative suggested that the SAD’s policy position was focused on achieving self- sufficiency in fertilizer production. Furthermore, it is influenced by the severe indebtedness of farmers and by the belief that the 7 percent price increase recommended by the ERC would impose further hardship on them.

3 The National Common Minimum Program constitutes a set of principles and objectives for the United Front government that was formulated in May 2004 by the Congress and its fourteen allies, which made up the United Front, after the Front swept to power in the fourteenth Lok Sabha elections that year. 64 CHAPTER 6

The Public Administration Within the GoI, the various stakeholders in the fertilizer policy process include the ministries of finance, chemicals and fertilizers, and agriculture. The interests and the mandate of the Ministry of Petroleum and Natural Gas (MoPNG) are also significant. Other ministries that have at least a minor role are those of commerce, railways, and transportation.

Ministry of Finance The primary role of the MoF is to maintain the macroeconomic health of the country, with an eye on the overall performance of the economy. It prepares the annual budget for the federal government, identifies strengths and weak- nesses of the economy, and uses various fiscal instruments to plot the economy’s future path, in keeping with the vision of the political leadership. In doing its job, the MoF faces several challenges. First, it needs to con- tain the federal deficit. The ballooning fertilizer-subsidy bill contributes to the federal deficit, and the job of reducing it falls on the MoF. Because it is now clear that a large chunk of the subsidy goes to the fertilizer manufacturers as well as to large farmers whose claims on that subsidy can be contested, the MoF’s own mandate requires it to address the subsidy issue. The MoF has repeatedly recommended that the government limit the total amount of subsidies and ensure that subsidies go to the intended beneficiaries—that is, poor farmers and consumers (Srivastava et al. 2003; MoF 2004a). This view also reflects the UPA government’s commitment to target subsidies, as expressed in the National Common Minimum Program (GoI 2004, 19). Second, the ministry needs to reconcile multiple long- and short-term government objectives. Thus, on the one hand, it supports the liberalization of hydrocarbon markets in India, but on the other, it has to review the short-term impact of this policy on the fertilizer industry and, by extension, on the farm sector. Interviews with members of this ministry reflected the concern about the size of the overall subsidy bill. The ministry, they argue, has acted in accor- dance with the National Common Minimum Program to target subsidies at the poor. Interviewees also questioned the need for continuing with the existing subsidy regime and suggested that a better-targeted regime might be more suitable to the current challenges facing Indian agriculture. The MoF looks at fertilizer as a tradable commodity and considers imports a viable option. However, it recognizes the other ministerial stakeholders’ positions in this debate as well as challenges associated with directly subsidizing farmers and with increasing the MSP. As of 2007, the MoF started advocating a nutrient- based fertilizer policy that presents an alternative mechanism for fertilizer pricing and for the delivery of subsidy. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 65

Ministry of Chemicals and Fertilizers In India, an entire department, namely, the DoF within the MoCF, is devoted to the fertilizer sector. The department’s specific goal is to protect the interests of that industry within the parameters of government policy.4 According to its website, it is committed to “structural reforms in the fertilizer sector including technological upgradation to make it efficient and price competitive by international standards within the broad framework of available feedstock and other raw materials” (MoCF 2009b). Its main clients are public-sector undertakings, multistate cooperative societies, and private companies. Any policy that would damage the interests of a majority of its clients is likely to be unacceptable to the ministry. It negotiates on behalf of the fertilizer industry with other ministries whose constituents’ interests may conflict with those of the fertilizer sector. In consequence, its position on fertilizer subsidy differs from that of the MoF. Although in theory the ministry accepts the need for decontrol, in practice it finds the policy difficult to advocate, as decontrol would hurt the viability of the industry. The MoCF hosts a Fertilizer Industry Coordination Committee (FICC), which was created to administer and operate the RPS and continues to administer the NPS for urea. The committee includes members from the industry, which therefore has a voice in the policy process and a forum for interacting with and influencing secretaries from the ministries of finance, industry, agriculture, and petroleum and natural gas and from the Tariff Commission. Although stakeholder consultation in policymaking is both necessary and beneficial, such close interaction between the industry and the MoCF makes it difficult to convince the ministry of the need for any change that would significantly hurt the industry’s interests. In its consultations with other ministries, the MoCF has argued that given the limited availability and the allocation of natural gas in India, the fertilizer units are performing at the highest efficiency possible. They would be more efficient if more of them were able to switch to natural gas from naphtha and other, more expensive and less efficient feedstock, but in light of the inadequate availability of natural gas and the need for India to produce urea domestically, it is unfair to blame the industry for the high subsidy bill. Further, it advocates self-sufficiency in urea production, arguing that given the size of the international urea trade, any changes in demand from India will affect prices significantly. The ministry’s negative experience with cartelization by the DAP manufacturers after

4 Representatives of the ministry identify this as a goal. It is consistent with the government’s commitment to producing urea domestically. 66 CHAPTER 6 the decontrol of DAP pricing shapes the ministry’s perception on urea price decontrol and liberalization of imports.

Ministry of Agriculture The primary mission of the MoA is to protect the interests of Indian farmers.5 With respect to fertilizers, their interests lie in ensuring adequate and timely availability of fertilizers at an affordable price. It plays a role in fixing the farmgate price for fertilizer. It is also involved, as a stakeholder, in all discussions and deliberations on policy matters. Although the ministry recognizes that there is room for prices to go up, it opposes such hikes because of the antifarmer perception associated with such a policy measure. Because the issue of farmgate price of urea is decided at the legislative level, the MoA has not had to openly fight to protect its core constituents, the farmers, in the same way that the MoCF has had to fight for the fertilizer industry. At the same time, the MoA tends to oppose policy change because of the associated uncertainty, including the possibility of supply disruptions and price increases.

Ministry of Petroleum and Natural Gas The last important player in the fertilizer pricing debate is the MoPNG, whose primary objective is to support the exploration and mining of hydrocarbons and to meet India’s growing demand for hydrocarbons. In doing so, it also protects the interests of its clients—the public-sector oil and gas production and distribution firms, some joint-venture firms, and private enterprises in the sector. According to the Vision 2020 document adopted by the government to restructure this sector, the ministry is mandated to bring prices of hydrocarbons to import parity levels. Naphtha prices, accordingly, were deregulated at the end of the 1990s. Although the price of natural gas has not been deregulated in such a public manner, the decline in availability of gas that is offered through the administered-price mechanism (APM) and the ability of private and public producers to charge market prices ensure that natural gas prices in India will increasingly be determined by market forces rather than by government fiat (Jackson 2005). Given this scenario, the MoCF has fought to make sure that the administered price stays low. Its focus now is on securing an adequate supply of natural gas as well as securing as much of the APM gas as possible. It also does not want to see the APM mechanism replaced or phased out. The MoCF as well

5 Interviews with officials in the ministry confirm that they see this as their primary task. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 67 as the fertilizer industry continues to lobby for a “rationalized hydrocarbon policy” that ensures priority allocation for APM gas and LNG at reasonable rates to cover the entire need of the fertilizer industry (Sriram 2005). As the debate on the availability, utilization, and pricing of natural gas in India has raged, the political leadership has repeatedly signaled that the fertilizer sector would be given priority while decisions are made on allocating any new natural gas supply (Financial Express 2007b; Business Line 2008).

The Role of Interests and Institutions in Shaping Fertilizer Subsidies It is common practice in political economy, when analyzing why certain changes have not taken place, to identify potential winners and losers. The issue of subsidy rationalization in fertilizers has all the hallmarks of interest-group politics. A small group of highly organized and wealthy fertilizer firms will likely lose if the protection accorded to them is withdrawn. A second group of highly influential, politically well-connected, rich farmers also stand to lose from higher prices for inputs. The potential beneficiaries of reform, however, are difficult to identify: although numerous, they are widely dispersed and unaware of their interests. Political scientists also examine the political institutions through which the interests articulated by producer and consumer groups interact with the government’s own priorities and legislative procedures to produce policy outcomes. In this section, we look at the interests of consumers (farmers), producers (fertilizer manufacturers), and the legislative and bureaucratic institutions through which these interests are mediated to bring about policy change. The section “Farmers’ Interests in Fertilizer Policy” discusses how interests and institutions have interacted in changing farmgate pricing. The section “The Role of Interests and Institutions in Determining the Policy Framework for Urea Producers” elaborates the role of interests and institutions in reforming the policy framework governing fertilizer producers.

The Role of Interests and Institutions in Determining the Farmgate Price of Urea As discussed in Chapter 4, one way of limiting the size of the fertilizer subsidy bill is by increasing the farmgate price of fertilizers. Because the price is administered and not market-determined, proposed increases must go through the budget process, which is inherently political and deliberative. This section focuses on two aspects of the government’s attempt to increase the price over the past two decades: first, the attempts to increase the farmgate price through the budget process, and second, the attempt to depoliti- cize the process by making yearly increases automatic, that is accepting the 68 CHAPTER 6

ERC recommendation of building in a 7 percent price increase every year. Analysis shows that the politics of farmgate pricing has been shaped by coalition politics and by strong farm interests represented at the cabinet level.

Farmers’ Interests in Fertilizer Policy The protectionist bias in agricultural policy in India is justified in the name of small and marginal farmers and poor consumers. Policymakers argue that the farmgate price of fertilizer needs to be kept low so that small and marginal farmers can purchase and use these inputs.6 They further argue that low input prices keep food prices low, thus protecting poor consumers. Although protecting the interests of small and marginal farmers is indeed important in a poor country, it is not entirely clear that keeping the farmgate price of fertilizers unchanged is necessary to ensure that end result. It has been suggested that the farmgate price of fertilizer be increased and that small and marginal farmers receive a direct subsidy to protect their interests. Although the veto on increasing the farmgate price comes from farmers regardless of farm size, the resistance to targeting the subsidy at small and marginal farmers comes, predictably, from owners of medium-sized and large farms (see “Automatic Annual Increases in Farmgate Prices”). Here we focus on the use of fertilizers by different groups of farmers and the structures of farm-sector interest articulation.

Use of Fertilizers and Farmers’ Interests It is logical to expect that farmers, who are the biggest beneficiaries of the fertilizer subsidy, would be the most vocal opponents of price increases. How- ever, because use of the fertilizer subsidy is not uniform across regions or across crops, we can expect to see some variation in interest articulation by farmers. For example, farmers in northern states and those farmers in irrigated areas take more advantage of subsidies than those elsewhere (Singh 2004). Wheat, paddy, and sugarcane growers receive more than half of the subsidy on fertilizers (Singh 2004). However, the intensity of fertilizer use on small farms matches or exceeds that on large farms, suggesting that small farmers indeed benefit from this subsidy. This finding would lead us to expect a higher degree of interest articulation by farmers from regions that receive larger subsidies and by growers of wheat and paddy. Although it is true that farm leaders from Punjab and Uttar Pradesh, among the largest users of the subsidy, are the most vocal opponents of price increases, this phenomenon has more to do with the fact that national agricultural ministers have historically

6 Interviews with officials in several ministries in New Delhi, June–July 2005 and August 2006. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 69 hailed from these states than with substantial variation in positions across states. Information gathered through our interviews suggests that farmers from other states take similar positions with respect to fertilizer subsidies and price increases.

Farmers’ Movements and Interest Articulation During the 1980s and 1990s, regional farmers’ movements emerged in several states in India calling for higher support prices (Brass 1995; Assadi 1997; Varsh- ney 1998). These movements, which were largely apolitical, were led by local activists. Although these movements were led by owners of large and medium- sized landholdings, small and marginal farmers also joined, as there was an identity of interests among all farmers on that issue. Such a unified movement does not exist today, and farm-sector interest articulation is quite fragment- ed.7 Not surprisingly, however, there is strong unified support for keeping input prices low, regardless of the size of farms, and all political parties and farmers’ organizations demand that the farmgate price of fertilizers be maintained at existing levels. As the discussion in the next section demonstrates, when fertilizers are made available through a pricing structure in which higher prices affect only owners of large and medium-sized farms, then we find clearer evidence of lobbying and exercise of veto from representatives of large and medium-sized farm owners from the northern states of Punjab, Haryana, and Uttar Pradesh. Such interest articulation takes place through the debates in the legislature, through incumbent politicians with strong farm-sector ties, and through ministry consultation with constituents.

The Role of the Executive and Legislature in Setting the Farmgate Price of Fertilizers To understand the role of government in setting fertilizer prices, it is necessary first to understand which Indian political institutions are involved. Through the budget process, the MoF sets the farmgate price and proposes increases in the price in consultation with the DoAC. The approval for such an increase has to come from the legislature. Within the executive branch, farmers’ interests are articulated by several cabinet ministers as well as the DoAC. In the legislature, a majority of the members of Parliament have primarily rural constituencies. In addition, various ministries consult with farmers’ groups during discussions on policy change in fertilizers.

7 Interviews with leaders of farmers’ associations, New Delhi, June–July 2005 and July–August 2006. 70 CHAPTER 6

The Politics of Increases in Farmgate Prices, 1991–2010 Attempts to increase the farmgate price of urea have succeeded in seven cases and failed in two. What lessons can we glean from these cases? First, we examine the cases in which the government was successful in increasing the price. In general, these changes were implemented when the minimum support prices of wheat and paddy were increasing at a slightly faster pace, thus acting as a quid pro quo for increases in fertilizer prices. Between 1990/91 and 2003/04, the minimum support price on paddy increased by 168 percent and on wheat by 193 percent, whereas the price of urea increased by 105 percent. Thus, farmers who sold their grains to the government’s food pro- curement system, mostly farmers with medium-sized and large farms from the northern states, were arguably not adversely affected by the increase in urea prices. It is important to note that on several occasions, price rises were successful when they were delinked from the budget process. In 1998 and 2003, however, the government was unable to increase the price as proposed and had to roll back the increase. The passing of the annual budget is a political process in which the government has a very high stake, as failure to pass it will cause the government to fall. At the same time, the opposition has higher involvement and visibility in the process. Because no politician in India wants to be seen as antifarmer, and because these debates took place at a time of widespread agrarian crisis and farmers’ suicides, opponents of urea price increases were able to play on politicians’ fears of negative publicity if they supported the measures. In both cases, substantial opposition came from within the coalition, particularly from the NDA partner SAD, of Punjab. In 2003, the proposed increase in fertilizer price had to be rolled back because senior members of the BJP, as well as key allies, openly opposed it (Hindu 2003; Telegraph 2003). A legislative majority in such a case is apparently a necessary but not sufficient condition for enacting a price increase.

Automatic Annual Increases in Farmgate Prices In 2000, the ERC recommended an automatic increase of the farmgate price by 7 percent every year (ERC 2000). It also suggested a pricing structure whereby farmers would be permitted to buy 120 kg of fertilizer at subsidized prices (using tradable coupons) but would have to pay (higher) market prices for any additional quantities. This proposal would not have affected small and marginal farmers but would have required farmers with medium-sized and large farms to pay higher prices. These recommendations, intended to insulate the pricing mechanism from political pressures as well as to create a dual pricing structure, were rejected POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 71 because politicians associated with large and medium-sized farmers were in charge of the decisionmaking process: Ajit Singh (a cabinet minister in charge of agriculture) and S. S. Dhindsa (a cabinet minister in charge of fertilizers). Both were members of the Group of Ministers that formulated the NPS under the NDA government. The group was asked to evaluate the recommendations made by the ERC. Singh and Dhindsa vetoed the inclusion of a yearly increase in the farmgate price of fertilizers in the policy package.8 Singh argued that further subsidy reductions should be based on improving manufacturing efficiency rather than charging higher prices to farmers. Although all Indian farmers, regardless of farm size or region, have an interest in maintaining the subsidy on fertilizer, it is the northern farmers with medium-sized to large farms who would be hurt most if the targeting policy were adopted. By leaving farmgate pricing out of the new policy framework and, perhaps more crucially, by not making targeted farmgate price increases automatic, leaders in charge of the new policy framework were able to resist increases in farmgate prices for fertilizer and keep the price-increase mechanism under the legislature’s control. This allowed the official retail price of urea to remain unchanged from 2002 to 2009.

The Role of Interests and Institutions in Determining the Policy Framework for Urea Producers Besides the two price-increase mechanisms discussed above, another way of reducing and rationalizing the subsidy on urea is to change the policies that govern its production and distribution. This approach is based on the argument that because the price of domestically produced urea exceeded the international prices for most of the 1980s and 1990s, the domestic urea producers were enjoying a part of the subsidy in the form of market protection (Gulati and Narayanan 2003). Earlier we discussed the details of the RPS and the NPS that succeeded it. Here we analyze the major obstacles to reform of the RPS, obstacles that continued to plague the reform process in 2009. Several factors have slowed the reform process. First, the fertilizer industry has continuously lobbied to maintain the protection it receives from the government. Second, the industry’s efforts are aided by the existence of an entire government department devoted to protecting its interests. Third, the mandate of the energy sector to liberalize prices and the inadequate supply of natural gas pose real challenges to structural changes in the industry.

8 Interviews with former ministers of agriculture, New Delhi, June 26, 2005, and August 7, 2006. 72 CHAPTER 6

The Fertilizer Industry, Variation in Feedstock Use, and Producer Interest Although the industry strongly influenced the debate on fertilizer subsidy and reforms, the inability of the government to decontrol urea is not entirely an outcome of the lobbying or financial power of the fertilizer industry: several other factors influence the issue. As discussed above, the cost structures of fertilizer units and the retention prices associated with them vary widely. Between 60 and 70 percent of the total cost of production goes to energy costs, and total spending on energy accounts for almost 90 percent of the variable cost of production of urea (FAI 1995). The retention prices of units reveal that units that use natural gas as feedstock have, on an average, lower retention prices than those that use naphtha, fuel oil, and other feedstock. To look at differences in interests, it makes sense to classify urea producers into categories according to feedstock use. Sixty-six percent of urea manufacturers use natural gas as feedstock, a little less than 30 percent use naphtha, and the rest use other feedstock, such as fuel oil and LSHS. The units that use natural gas are the most efficient and, in general, use a smaller subsidy than the naphtha-based manufacturers. Arguably, a high-cost producer is more likely to resist market-oriented reforms than a more efficient and lower-cost producer. Under a decontrolled policy framework for urea, the naphtha- and fuel-oil-based plants would not be able to compete with imported urea (ERC 2000). Thus there is a strong and obvious reason for the naphtha-based manufacturers to lobby for the continuation of the RPS. However, the nature of the interest articulation process in the fertilizer industry makes it difficult to prove that it is indeed only the naphtha-based manufacturers who have lobbied the government. Further- more, even gas-based manufacturers have a strong interest in lobbying for the status quo. The supply of subsidized natural gas has been decreasing, and the pricing of natural gas may likely be determined by market forces in the future. It is not clear how many producer units will remain viable in the face of imports if natural gas prices are completely decontrolled. Consistent with this expectation, we find that regardless of the feedstock used, urea manufacturers lobby the government in order to protect their objectives. However, it would be wrong to conclude that only naphtha-based units had an interest in resisting a change in the subsidy regime. Because the pricing and availability of natural gas were uncertain, gas-based manufacturers also had reason to lobby for a continuation of the status quo until the government’s overall policy on fertilizers was clear. Overall, India’s gas-based manufacturers have been found to be globally competitive (Gokak Committee 2003, 19–21). However, that conclusion was POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 73 reached based on natural gas priced at Rs 2,850 per million cubic meters (mcm). The gas supplied to the fertilizer sector by domestic public-sector firms in 2009 was priced at Rs 3,200/mcm (MoPNG 2009). In 2009, the supply of gas available at that price was not adequate for the entire fertilizer industry. The government has allowed new gas finds to be made available at market-determined prices. It is unclear what impact decontrol of prices will have on the competitiveness of the fertilizer industry. Although the total gas requirement for the existing gas-based units was 33.01 million standard cubic meters per day (MMSCMD) in 2004/05 and 34.72 MMSCMD in 2005/06, the actual average supply during those years was 23.79 MMSCMD and 28.48 MMSCMD, respectively. Projections based on existing demand, proposed expan- sion, conversion from other feedstock to natural gas, and proposed revival of nonoperational plants suggest that the demand for natural gas will rise to 76.269 MMSCMD by 2011/12. The total projected supply of natural gas is also expected to increase to 191.42 MMSCMD in 2011/12 by the most conservative estimate (a more optimistic estimate puts the figure at 285.42 MMSCMD) (DoF 2007, 11; Planning Commission 2007, 128–130). However, although availability will increase, most of the future gas needed by the fertilizer industry will be available at market prices, not at administered prices. The prime minister has promised to prioritize APM gas allocation to the fertilizer industry, and the government has also made a commitment to continue with the APM for the foreseeable future.9 As long as the fertilizer industry is controlled by the government, when feedstock prices go up, fertilizer units can generally pass on the price hikes by charging higher retention prices. Any decontrol in the context of an inadequate supply of natural gas would jeopardize the prospects of both gas- and non-gas-based plants. Producers in other countries, particularly in the Middle East, have access to cheap natural gas and thus lower costs of production. Given the uncertainty in the availability and pricing of natural gas, both naphtha-based and gas-based urea manufacturers have had an interest in lobbying against decontrol. In the future, even if the supply of natural gas increases, the fertilizer sector will have to compete with other sectors, including power and transportation, to procure the natural gas it requires.

Interest Articulation by the Industry The reform process itself is opaque and does not allow us to link specific reform outcomes to specific lobbying efforts. Under the circumstances, we can

9 Interview with official in the MoCF, New Delhi, July 2007. 74 CHAPTER 6 identify the industry’s overall position and help establish that the fertilizer industry, through FAI lobbying, influences policy on fertilizers. However, we cannot determine which part of the industry (naphtha-based vs. gas-based) or which specific firms have played the most significant roles in shaping policy on fertilizer subsidies. A further analytical problem is that the arguments made against liberalization by the FAI are almost identical to the arguments made by bureaucrats and politicians, making it difficult to demonstrate that interest-group lobbying has played a determining role in stalling the reform process. During every reform effort, the industry has lobbied to stall reforms (Kumar 1999; Gupta 2000a, 2000b). Besides articulating its own positions at various venues and through the press, the industry has pursued four goals. First, it has made the case that the fertilizer subsidy is an inherent part of the government’s concern for food security and as such cannot be reduced without heavy political costs. FAI officials argue, as do several members of the government, that a reduction in the subsidy will jeopardize the objective of food security.10 Second, whenever a proposal has been made to deliver the fertilizer subsidy directly to farmers, the FAI has highlighted the logistical problems associated with such a task, again closely mirroring the views of several politicians and bureaucrats (Damodaran 2000; Gupta 2000c, 2003). Third, the industry has publicly exploited differences within the government to further its own agenda. In an opinion piece written shortly after Finance Minister Sinha announced that the government would implement the recommendations of the ERC, the FAI’s chief economist accused the finance ministry of going against the stated preferences of the DoF as well as of the chief ministers of several Indian states, all of whom had written to the finance minister and the prime minister to express their concerns about the implementation of the ERC recommendations and its impact on farmers and poor consumers. The FAI statement further highlighted the lack of coordination of the ministries involved in the process. The FAI has also repeatedly argued that the fertilizer subsidy is, in reality, an intraeconomy transfer that benefits government-owned oil and gas companies. Through the subsidy, the government indirectly allocates money in the Annual Budget to public sector undertakings in the petroleum and gas sectors (Gupta 2000a, 2000b; Kaushik and Gupta 2003). In reality, the fertilizer industry is free to import its feedstock at competitive prices. Its argument that the petroleum and gas firms are charging them abnormally high prices can be easily countered by

10 Interviews with FAI and MoCF officials, New Delhi, June–July 2005. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 75 asking the industry to secure sources of natural gas from abroad instead of depending on the domestic suppliers only. The ERC noted that the industry has not made vigorous efforts to secure sources of supply of natural gas, but has argued instead that the government should do so (ERC 2000, 45).

Interbureaucratic Politics Although the fertilizer industry’s lobbying power is not in doubt, it is necessary to investigate the institutional features of the Indian political system that enable it to further its goals. The existence of a separate DoF within the MoCF allows the fertilizer industry’s concerns to be heard both at the level of bureaucratic interactions and within the cabinet. Fertilizer policy reform is enacted by executive decision and does not require legislative approval. The reform process can best be understood by focusing on the various government stakeholders, identifying their positions, and reviewing the process for resolving conflict among these stakeholders. The efforts of the MoF to decontrol the urea sector have been thwarted in the past in part because of the sector-specific interests of the MoCF and the MoA. Several efforts to reform fertilizer subsidies have originated in the MoF. The call for a consensus on subsidy issues originated in this ministry. The MoF, for example, ordered the ERC report, and the call to adopt it in full came from the finance minister in 2001. In 2005, the MoF engaged in widespread consultation with stakeholders to find ways of cutting subsidies on food, fertilizer, and petroleum.11 Besides containing the deficit, the finance ministry allocates money to different sectors through the annual budget. Over the past decade and a half, agriculture has suffered from a lack of public investment. The MoF has argued that if new investments are to be made, resources must be freed from other parts of the budget, for example by reducing all subsidies, but particularly those for urea, which is where the most restructuring can take place.12 How- ever, the MoF does not have the authority to unilaterally enact cuts to the subsidies or to propose a policy structure in the fertilizer sector. For that it has to negotiate with the DoF on the one hand and the DoAC on the other. The MoF also plays a role in setting feedstock prices that affect the price of fertilizer and therefore the subsidy associated with it. In recent years, only the views of the Planning Commission on government spending have accorded with those of the MoF. All other ministries involved in the ratio-

11 Interviews with officials in the Department of Economic Affairs, MoF, New Delhi, July 2005 and August 2006. Minutes of some of these consultations are available at http://finmin.nic.in/ the_ministry/dept_eco_affairs/economic_div/foodsubs.htm. 12 Interviews with MoF officials, New Delhi, July–August 2006. 76 CHAPTER 6 nalization of the fertilizer subsidy have different and sometimes conflicting interests. In 2003, the decision to adopt the NPS was successful because the immediate changes proposed were fairly limited: fertilizer units were encouraged to improve efficiency without substantially changing the policy framework. As noted earlier, the group of ministers who negotiated the NPS were able to safeguard the individual interests of the group members. Pub- licly, the ministers of finance, agriculture, and petroleum and natural gas had little reason to obstruct the NPS. Having safeguarded the interests of its constituents by breaking the reform process into three stages and leaving the most important, third stage undetermined, the MoCF also had no strong reason to object to the new policy. However, when the time came to adopt the Alagh Committee’s recommendations for the third stage of the NPS, the MoCF persistently opposed the first-best and second-best strategies discussed earlier.13 The government finally decided to continue with the groupwise concession scheme adopted in 2003. The MoF announced its intention to test direct delivery of subsidy to the farmer, but ultimately that initiative too was abandoned because the DoF, which was entrusted with it, decided against implementing it. Past efforts at fertilizer policy reform have been hindered not only because the fertilizer producers’ lobby has been well organized and active but also because the existence of the MoCF and DoF offers the fertilizer industry an exclusive channel through which it can articulate its interests at the ministerial as well as the cabinet level. However, the support for the status quo in policy has come not only from the DoF but also from the DoAC in the MoA. Support for change in policy has come only from the MoF and from the Plan- ning Commission. Given this balance of power, it would be tempting to conclude that bureaucratic politics alone has derailed fertilizer policy reform. However, it is also necessary to ask why the Ministry of Finance has not been able to garner more support for its liberal position. Discussing interbureaucratic politics in farm-sector policymaking, Varshney (1998, 181) observes that “the Finance Ministry in particular stands out in its influence over the conduct of economic policy.” Its power arises from its control over the government’s purse strings. Why, then, has the MoF not been able to successfully push fertilizer subsidy reform? Why, when reforms have taken place successfully in other sectors, have reforms in fertilizer stalled repeatedly? To answer these questions, we must look at the ideas and discourses that dominate the debate on fertilizer policy reform as well as the relative sizes, arguments, and positions of the coalitions on both sides.

13 Interviews with MoF officials, New Delhi, July–August 2006 and July 2007. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 77

The Role of Ideas: Self-Sufficiency in Fertilizer Production There are two competing discourse coalitions on the issue of fertilizer policy. This section describes their core beliefs and the specific beliefs (see “Beliefs and Paradigms” in Chapter 3).

Core Beliefs (Paradigms) The core beliefs or paradigms that characterize the two discourse coalitions are referred to here as market-oriented and welfare-state-oriented. Apply- ing the labels that are commonly used in the policy debate in India, these paradigms could also be referred to as neoliberal and populist, but both these labels have a negative connotation in the Indian debate. Still, in view of their wide use, it is useful to briefly consider the meaning of these terms. Neoliberalism has been described as a political and economic philosophy associated with five basic values: the individual, freedom of choice, markets, a laissez-faire outlook, and minimal government (see Belsey 1996). These values are in fact central to the “market-oriented” paradigm. Although defi- nitions of populism remain contested, the term typically refers to the view that the instruments of the state should be applied in favor of the “common people,” who are oppressed by societal elites (see Canovan 2004). Populism may be associated with right-wing as well as left-wing political ideologies, religious fundamentalism, and other worldviews. Hence, the label populist is not appropriate to describe the core belief system that is charac- terized as welfare-state-oriented here. According to this paradigm, market forces do not automatically lead to socially desirable results. Hence, in the welfare-state-oriented paradigm, the state has a responsibility to guarantee the welfare of its citizens. Table 6.1 characterizes the main elements of the two core belief systems, or paradigms, as reflected in the interviews. As was apparent in some of the interviews, each paradigm is associated with a positive self-representation and a negative other-representation, which are also shown in Table 6.1. One has to keep in mind that the table presents stylized facts or “pure types” of the respective core beliefs.14 Individuals and groups typically hold positions that are somewhere in between, or combine elements of, the pure types described in the table. Proponents of each of these paradigms see food security as a necessary goal. However, they hold different views regarding the mechanisms that are appropriate for achieving food security: the market

14 Introduced by the German sociologist Max Weber, a “pure type” or “ideal type” (Idealtyp) is an analytical construct, in which many discrete individual attributes are arranged and synthe- sized into a single category by emphasizing one feature of those attributes. Using pure types or ideal types is a common approach in sociological analysis. 78 CHAPTER 6

Table 6.1 Core beliefs (paradigms) and self- and other-representations

Topic Market-oriented paradigm Welfare-state-oriented paradigm

Role of the state Markets are the only coordination Markets, while in principle useful as and the market mechanism that leads to efficient a coordination mechanism in the outcomes. economy, do not lead to socially Any state intervention has to be desirable results. designed in such a way that Market failures abound. Hence state markets are not distorted. intervention in markets is State failures abound. Hence state necessary to ensure socially intervention in markets should be desirable results. minimized. Nature of state The state should play only a coordi- The state should play an active role intervention nating, facilitating, and regulating and engage in the provision of role in markets. basic services. Approach to Market-based instruments should be Regulatory instruments should be environmental used (such as price mechanisms used (such as restrictions on problems and tradable permits). activities). Positive self- Defender of a well-managed Defender of the common people/ representation economic system (which, by the poor and their livelihoods. implication, ensures poverty reduction). Negative other- They don’t understand the basic They enjoy their own privileges and representation principles of economics. don’t care for the common people They represent the interests of the or the poor and their livelihoods. corrupt state bureaucracy. They represent the interests of global capital.

Source: Authors. versus state intervention. Stakeholders also disagree on the definition of food security as well as its urgency and importance relative to other socioeconomic issues facing India. One could define a third paradigm that focuses on communities and civil society rather than on the state or the market. However, although some interviewees mentioned community-based approaches in some contexts, such as decentralization, they were not central to any of the interviews conducted for this study. Therefore, the community-oriented paradigm has not been included as a third paradigm in Table 6.1. However, as Chapter 11 argues, a stronger focus on the community-oriented paradigm—as a third way between state and market—could be very useful in identifying policy solutions, especially for electricity subsidy reform. Table 6.2 presents major story lines related to fertilizer supply to agriculture. The observations in this table are based on the interviews and serve to identify specific belief systems. They correspond to the market-oriented paradigm on the one hand and the welfare-state-oriented paradigm on the other. The story lines that emerged in the interviews were partly triggered by POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 79 interview questions. Like Table 6.1, Table 6.2 presents ideal types of these story lines. The two discourse coalitions differed on the ways they interpreted the agricultural and economic context in which policy was to be changed, the appropriateness of specific policies, the need for and shape of fertilizer policy reforms, the importance of self-sufficiency in urea production, and the consequences of policy change. Almost all the interviewees who identified with the welfare-state discourse pointed out that 80 percent of farms were small and marginal and that those farmers needed government help to purchase inputs. They further pointed out that given the widespread reporting of suicides in the countryside, end- ing the subsidy would be politically infeasible and inappropriate. They also observed that this policy benefited the poor, as it kept the price of food grains low and helped achieve self-sufficiency in foodgrain production. Such views were presented by people from diverse backgrounds: former directors of the FAI, the chief executive of a fertilizer company, and former secretaries of the DoAC. A former Minister of Agriculture said, “Input cost needs to be reduced for the small farmer, who won’t benefit from liberalization.”15 A farm-association representative said that the government subsidized farmers because it wanted to maintain lower food prices, given the large number of poor consumers in India. If the government increased the support prices or allowed farmers to seek market prices, then the subsidy perhaps would not be necessary. However, the same person said that farmers could not survive if the government withdrew from the market. A former director of the FAI said that the association had challenged the government to eliminate the fertilizer subsidy completely and asked how many farmers would be able to afford decontrolled fertilizers. Members of the market-oriented discourse coalition, on the other hand, asked why the fertilizer sector should remain protected when liberalization has brought gains in other sectors, such as telecommunications. This group, which includes, among others, liberal economists in think tanks, in the press, and in the private sector, ask whether continuing with the fertilizer subsidy is the “best way to raise agricultural production,” given that the marginal return on government spending on fertilizer subsidy is very small (Gulati 2007). This group is fairly unanimous on the idea that farmers’ and fertilizer- producers’ lobbies inhibit reform. As to the importance of fertilizer subsidy, the market-oriented discourse argued that rationalization of fertilizer subsidy was necessary to reduce the

15 Interview with a former minister of agriculture, New Delhi, June 26, 2005. 80 CHAPTER 6 get rates and suicide welfare consequences in important instrument for all farmers should be able to indicated by high or Welfare-state-oriented paradigm Agrarian crisis, Economic reforms have harmed farmers, especially access to institutional credit and extension. Fertilizer subsidies are an crisis in the agricultural sector. the alleviating reform. fertilizer national government’s financial woes or the problems in the farm sector. subsidized fertilizers to keep food prices low. Subsidy to large farmers has receive food grown in the former. Land reforms have not been implemented. the form of cheap food. implications for other states because the latter high levels of indebtedness. small and marginal farmers, for example by reducing targeted Rich farmers (“landlords”) should pay higher prices for leading to increasing b one of the factors responsible rationalization of fertilizer Market-oriented paradigm – urban income disparity. small and marginal farmers. Low growth rate in agriculture, Subsidies crowd out productive investments. Too much emphasis is placed on foodcrops (which could Minimum support prices are too low. be imported). Farm lobby prevents reform. A drain on the national government’s financial and provided in a way that does not distort markets fertilizers, (for example, as direct income transfers or entitlements). tradable Large farmers receive more of the subsidy than do Some states, especially northern receive more subsidy than others. Use of urea by food-producing states has welfare

Because reforms have not gone far enough, large inefficiencies remain.

a agricultural sector (f) Table 6.2 Major story lines and specific beliefs: Fertilizer policy Agricultural situation in general General situation of agriculture (f) Fertilizer subsidies to agriculture Role of fertilizer subsidies (f, p1) Fertilizer subsidies are Magnitude of the subsidies (p2) Very high. Targeting of subsidies (p2) for low public investment in agriculture and If subsidies are provided at all, they should be therefore for the crisis in farm sector. To alleviate the crisis, subsidy is needed. resources. The farm-sector crisis can be alleviated without Major reason for high fiscal deficit and low public agriculture. in investment Considerable, but not one of the major causes Distributional distortion due to subsidy on urea (f, p1)

rural Reasons for problems in the POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 81

and likely to fail rather than decrease it. logistically challenging government’s responsibility to obtain It is necessary to be self-sufficient. Dependence on imports may actually increase the expenditure on the subsidy Food security will be threatened by dependence on imports. urea Price decontrol of diammonium phosphate has shown the problems associated with such policies. subsidized gas for urea units. Perform a public service and are not compensated Supply-side reform and farmgate price increases can gradual separate. kept be and consume about two-fifths of Self-sufficiency is not a necessary goal. Liberalization, privatization, and competition Enjoy protection Authors. Italicized terms are key words or phrases that often used to refer the entire story line. Type of belief: f, factual and causal beliefs; p1, central policy p2, instrumental beliefs. Relationship between self-sufficiency in fertilizer production and food security Self-sufficiency in urea production (p2) Relation between self-sufficiency in urea production and food Food security can be maintained even if needed urea security (p1) is imported. Fertilizer policy reforms The need for urea can be met through domestic Model for reforms (p1) imports. and production Feedstock supply to urea units (p1) It is the responsibility of urea units to procure natural Domestic fertilizer companies (p1) It is the Farmgate price of urea (p2) Direct subsidy to farmers (p2) Any viable reform option must incorporate a essential. are The telecom sector provides an example of successful Would rationalize the subsidy greatly and possibly Source: reforms. Given the current availability of natural gas, decontrol a Complete decontrol is an appropriate goal. b Would be gas and to pay market prices for it. subsidy. the further limiting self-sufficiency in production. With imports, production may fall, and the price of increase in the farmgate price of urea. reduce government expenditure on subsidies. food may go up. because of leakages. Expenditure on subsidies of urea would wipe out some Indian companies, so. doing for adequately therefore might not decrease. 82 CHAPTER 6 budget deficit and bring about equity in subsidy distribution. One former agriculture minister (perhaps the only one identified with the market-oriented discourse) said that because of the subsidy and the protected regime, “you make farmers pay more and then pay them more.” Further, this informant asked, “Why not import manufactured fertilizer rather than just the feedstock? Why not ask the fertilizer sector to face [the free] market?”16 Members of this coalition recognize, however, that advocating a flat or reduced subsidy immediately makes one “antifarmer.” Those on the welfare-oriented side argue that other groups receive bigger subsidies and that rationalization of the fertilizer subsidy is not necessary to solve the problems in the farm sector. One economist suggested that when farm incomes are going up by only 1–1.5 percent, it becomes difficult to talk about subsidy reform because the government is not giving anything in return. The two discourse coalitions differed on whether self-sufficiency in fertilizer production is necessary for self-sufficiency in foodgrain production. A former secretary of the agriculture ministry argued that the government had promoted self-reliance in fertilizer in order to increase the supply of foodgrain. One liberal economist from the private sector argued that although the fertilizer industry may help ensure food security, it is not its “sole custodian.” Another liberal economist employed by the government stated that the need for self-sufficiency was accepted to a certain degree and that there was a genuine fear that erosion of self-sufficiency in fertilizer production would jeopardize food security. One bureaucrat pointed to a further problem in the link between fertilizer subsidies and food security: if the fertilizer price increased, then the support prices would also have to increase because of political pressures, and the subsidy on food would also rise, thereby negating the deficit-easing impact of the fertilizer price increase. A former secretary of the DoF said that food-security concerns motivated the department’s arguments for continued subsidy to the industry. The market-oriented point of view was provided by another MoF bureaucrat, who argued that because India had adequate foreign-exchange reserves, it should not be difficult to import urea rather than emphasize self-sufficiency. The two sides also differed on their attitudes toward the fertilizer industry and its prospects. Those from the welfare-oriented coalition argued that liberalization would wipe out some Indian manufacturers, thereby further restricting self-sufficiency. Almost all representatives of the fertilizer industry and ministry made this argument. They were also unanimous that the government’s supply of subsidized natural gas ensured the industry’s survival.

16 Interview with a former minister of agriculture, Gurgaon, June 28, 2005. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 83

The other side argued that fertilizer units, either individually or in groups, should negotiate gas contracts with foreign suppliers and not depend on government protection. As to the perception of the role of these firms in the distribution of subsidies, the market-oriented discourse identifies them as major recipients of the fertilizer subsidy, whereas members of the fertilizer industry and others identified themselves as entities engaged in public service. A former official of the FAI said that the fertilizer companies were conduits for channeling the subsidy to the political constituents of the MoA and the MoPNG. The fertilizer companies were also seen as conduits for transferring subsidies from the government to the farmers. Understandably, this group also tends to think that if the industry withdrew from the distribution of fertilizers, the entire system would collapse as a result of corruption, nepotism, and logistical difficulties. This position counters the market-oriented position that the subsidy needs to be given directly to the farmers to avoid leakage. The coexistence of these discourses and the presence of substantial coalitions backing each one pose a major challenge to policy reform. Although a consensus on economic liberalization seems to dominate the rhetoric on economic policy in India and even discussions on fertilizer policy, the consensus on a number of positions from the pre-1991 reforms also seems unchanged. This paradox makes it difficult, if not impossible, to translate the liberal rhetoric into political action. In fact, it often appears that the Indian policy process is moving in opposite directions (Bardhan 2003). Each of the discourse coalitions can claim membership from several categories of stakeholders (although no one in the fertilizer industry seemed to belong to the market-oriented coalition). The coalition in favor of change is smaller than that advocating maintenance of the status quo. The latter also articulates its case more forcefully and benefits from the fact that its opponents’ position is less clearly defined and less assertive.

The Coalition in Favor of Change The coalition that advocates a more market-oriented policy framework for nitrogenous fertilizers comprises the MoF, some members of the Planning Com- mission, international financial institutions such as the World Bank, some farmers’ organizations and political leaders, a section of the English-language print media, and individual economists. The positions of these entities are neither identical nor constant. For example, since 2004 the MoF has focused less on reducing subsidies than on targeting them. As the fertilizer-subsidy bill ballooned in 2006, the focus shifted again more sharply to subsidy reduction.17 Such

17 Interviews with MoF officials, New Delhi, July 2005 and August 2006. 84 CHAPTER 6 variation in the ministry’s emphasis is also evident from successive issues of the annual Economic Survey, brought out by the ministry before the announcement of the annual budget. Although the MoF does not consider self-sufficiency in urea production essential, it has not advocated strongly in favor of import liberalization or even partial decontrol of the sector. It has to balance these objectives with the need to attract further investment in the fertilizer sector. The Planning Commission also emphasizes the need for better targeting of all kinds of subsidies but is more concerned with the distortions and deleteri- ous effects on natural resources and cropping patterns exacerbated by the fertilizer subsidy (Planning Commission 2002). However, a recent paper from the Planning Commission suggests that fertilizers need to be treated as a stra- tegic sector and thus need special protection (Planning Commission 2007). The World Bank has repeatedly identified subsidization of agricultural input as a major obstacle to India’s efforts to fight poverty and to re-energize the agricultural sector. In recent reports, it has endorsed the position taken by the MoF on fertilizer subsidy rationalization and has urged the government to scrap the RPS (World Bank 2004c). However, in policy debates in India, bureaucrats and politicians do not cite the recommendations of international financial institutions while advocating for liberal policies because doing so can be politically counterproductive.18 The Indian media have also supported reform efforts by the government. Editorials of publications such as Business Line, Indian Express, and Economic and Political Weekly have noted that the fertilizer subsidy has added to budget deficits and that the rise in subsidies has led to a steep fall in public investment in agriculture, which in turn has limited growth in the farm sector. However, its position has not been consistent, and, given the restricted readership of the English-language press in India, it cannot be considered representative of public opinion in rural areas. Therefore, the media’s support for a liberal policy framework can easily be dismissed in policy debates as not entirely relevant to the welfare of the rural population. Although several economists who favor liberal policies have made recommendations as heads of government-appointed committees, their advisory role constrains their influence in the absence of political support.

The Coalition in Favor of the Status Quo The coalition that advocates the continuation of the existing policy framework for fertilizers consists of the MoCF, the MoA, political parties, farm-

18 Interviews with several bureaucrats and politicians, New Delhi, June–July 2005 and July– August 2006. POLITICS OF FERTILIZER SUPPLY TO AGRICULTURE 85 ers’ groups, and the FAI. Here, too, the various entities express divergent views, but they generally share the view that self-sufficiency in nitrogenous fertilizer production is necessary for maintaining adequate production of foodgrains and thereby India’s food security. The DoF, which is charged with the responsibility of setting fertilizer policy, carries substantial weight in any policy debate. The DoF is also the main advocate for self-sufficiency in fertilizer production. Its 2007 annual report states that the government’s professed policy has been to achieve the “maximum possible degree of self-sufficiency in the production of nitrogenous fertilizers based on utilization of indigenous feedstock” (DoF 2007, 4). The MoA, which also wields substantial influence as the representative of farmers’ interests, supports MoCF’s position. Thus, in debates at the ministerial as well as the cabinet level, there are usually two strong voices in favor of the status quo. The idea that self-sufficiency in urea production is necessary for maintaining foodgrain production and thus food security has not been seriously challenged at the policymaking level.

Policy-Oriented Learning across Coalitions Although the members of each discourse coalition share ideas and views, it is unclear how much sharing happens across coalitions. Without some level of exchange and consensus on key issues, progress toward policy reform is impossible. In this section, we point to the areas where consensus already exists, which may present avenues for future reform. At the beginning of this decade, there was consensus across coalitions that the urea industry was in need of reform. This common idea offers the different coalitions a starting point for discussion and negotiation. Such a consensus was completely absent in the 1990s. Second, the coalitions generally agree that the subsidy should be targeted at small and medium-sized farmers and that it should be given directly to the farmers. Both express doubts, however, as to whether such a method of distribution would work. Third, the two groups agree that the distribution and use of fertilizers needs improvement. Both coalitions recognize that some technological improvements, such as the balanced use of nutrients and aggressive use of micronutrients, might reduce urea use and therefore the subsidy bill. Finally, there is a consensus that better problem identification and definition will help foster a constructive exchange of ideas. The idea of food security underpins most debates on the farm sector in India. Since the 1970s, however, India has been growing enough foodgrains to achieve food security (Varshney 1998). The current problem is a “paradox of persistent hunger” (Pinstrup- Andersen 2002). According to estimates by the Food and Agriculture Orga- 86 CHAPTER 6 nization in 2001, more than 225 million Indians remained chronically under- nourished, while the government strained its budget to procure and store 58–60 million tons of foodgrains. The existing food-management paradigm can mitigate India’s new food-security problem only partially. Therefore, India’s food-security problem today is different from the problems it faced in the 1960s and requires a different solution. If self-sufficiency in urea production is defined as a priority, then the menu of options for reform is substantially restricted. All committees appointed by the government have recommended policy changes within the parameters of maintaining self-sufficiency, such as moving toward a uniform normative price and eventual conversion from other feedstocks, such as naphtha, to natural gas (HPRC 1998; ERC 2000). However, because the supply of natural gas is inadequate to meet the needs of all fertilizer units, such reform has not taken place. Although the debate on subsidy reduction in India is at least fifteen years old, the need to reform the policy structure governing nitrogenous fertilizers was not accepted by the policy community until the end of the 1990s. In 1997, the United Front government first suggested that a reduction in the size of the subsidy was necessary, and following this realization the Hanumantha Rao committee was set up. It seems reasonable to conclude that a consensus on the need for the liberalization of the fertilizer industry has not replaced the broad consensus on the need for self-sufficiency in fertilizer production.