Rethinking fertilizer subsidy 

The government should work towards gradually removing regulatory barriers as well as subsidies in fertilizer import. For as long as these prevail, the private sector cannot enter and compete.

File photo/RSS

Ayushma Maharjan

  • Read Time 4 min.

On Saturday, farmers in Dhading seized smuggled chemical fertilizers that were being escorted by Armed Police Force. This incident depicted the acute shortage of fertilizers in the country that severely affects plantations during peak seasons—one of the major concerns of Nepali farmers.

Smuggling of fertilizers from neighboring India is not new to Nepal. Every year tons of fertilizer are “smuggled” into the country to meet the demand of farmers whose livelihoods depend on good harvests. This practice provides the answer to one vital question: Why would farmers prefer to use high-priced smuggled fertilizers over government-subsidized fertilizers?

The most obvious reason is the failure of the state to provide an adequate and timely supply of fertilizers throughout the country. In Nepal, the government is the sole importer of chemical fertilizers, and the sector has been barred for private companies to invest. The government has established a publicly owned company, Agriculture Inputs Company Ltd (AICL), which imports fertilizer products and distributes them to farmers, with the help of Salt Trading Company Limited (STCL), in the different regions of Nepal.

The chemical fertilizer import surged after 2009. Since then, a timely supply of fertilizer has been a promise made by the government in each budget speech. Despite these efforts, the subsidized fertilizer cannot still cater to the widespread demand from farmers throughout Nepal. In FY 2015/16, the Ministry of Agriculture Development estimated the total fertilizer demand to be approximately 785,000 MT. However, in FY 2021 it was reported that the government has been able to supply only 63 percent of the 2015 estimate of chemical fertilizers. The demand has indeed escalated today when compared to six years before.

Lack of competition and excess demand in the sector has indeed fueled fraudulent practices in the sector. Such practices are not only prevalent in the case of fertilizer but also in all other forms of farm subsidies provided by the government. In FY 2015 alone, the government allocated a record high of NPR. 15 billion in fertilizer subsidy to boost agricultural productivity and ensure its widespread access. Despite the concentration of a significant amount of the agriculture budget towards fertilizer subsidies, the results were abysmal, as farmers continued to struggle for its access.

The most apparent problem is the weak governance that has instigated challenges attributable to the frequent misutilization of funds. The subsidy programs were introduced with the intention to help small and marginal farmers earn decent livelihoods and climb out of poverty. However, numerous reports have revealed that small and marginal farmers have limited to no access to subsidies. From fertilizers to modern tools and technology, to loans on agri-business are often granted to large farmers or those with political influence. Moreover, in FY 2021, it was reported that 10 percent of almost 500 thousand tons of chemical fertilizer imported in subsidy for the purpose of agriculture was allegedly misused and supplied to the plywood industry for gluing purposes.

Given the scenario, the small and marginal farmers reluctantly depend on high-priced fertilizers imported from informal markets.

Despite the recurrent misuse, the government has not used prudence in reforming plans and programs targeted at ensuring adequate and easy access to vital farm inputs like fertilizer. Thus, Nepal needs to rethink its fertilizer distribution strategy, such that the adopted measure will not only generate preferred results but also will help mitigate the fraudulent practices in the sector. Food Agriculture and Natural Resources Policy Analysis Network (FANRPAN) conducted a study in Malawi which revealed that direct input distribution in agriculture is costly for the government and is more susceptible to fraud and corruption. It is thus important for the government to rethink the input distribution system that is most economically enhancing for smallholder farmers.

Nepali farmers will be better off if the agriculture input market operates under high private-sector competition by ensuring adequate supply, reduced cost, and greater access.

One of the most important reforms that government must work towards is gradually removing regulatory barriers as well as subsidies for fertilizer import. For as long as these prevail, the private sector cannot enter and compete. It would indeed contribute towards resolving the current absence of sufficient fertilizers that has resulted in black marketeering, and availability of low-quality inputs; thereby increasing the cost and reducing the output. In fact, exemptions in tax and other regulatory costs can facilitate the supply of fertilizer and seeds by the private sector at a lower cost. Such a strategy was implemented by Indonesia from the period of 2013-to 2017. The policies adopted focused on minimal government intervention and liberalizing the sector by removing regulatory hurdles that hindered growth and competition in agriculture. The policies helped Indonesia experience an increase of 56.7 percent in investment in agriculture input.

Another alternative is to promote the use of organic fertilizers which have been underutilized. It is apparent that Nepal is not capable of producing its own chemical fertilizers as it has no raw feedstock or materials. Also, it is costly for Nepal to produce and compete against neighbors such as India. On the other hand, organic fertilizer plants in Nepal are increasing. Twenty-five private industries were established by FY 2015/16, with a production capacity of over 100,000 MT. The Ministry of Agricultural Development (MoAD) simultaneously promoted the use of organic fertilizers to meet demand and reduce the negative impact of chemical fertilizers. The Agriculture Development Strategy and Prime Minister Agriculture Modernization Project also prioritize the promotion of organic fertilizer production and distribution as one of its major objectives. On the contrary, the organic fertilizers are underutilized as the industries cannot compete with the surging import of heavily subsidized chemical fertilizers along with the lack of awareness among farmers regarding the benefits of organic fertilizers.

While the government introduced the Organic Fertilizer Subsidy Guideline (2011), given the outlook of subsidized chemical fertilizers and the fraudulent practices, the implementation of a subsidy program in organic fertilizer might be subject to a similar fate. Thus, refraining from subsidizing altogether, the Nepali farmers will be better off if the agriculture input market operates under high private-sector competition by ensuring adequate supply, reduced cost, and greater access.

Ayushma Maharjan works as a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization.

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