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Fertiliser Subsidy in India: Who Are the Beneficiaries?

There is a general view in academic and policy circles that fertiliser subsidies are concentrated geographically on a relatively small number of crops and producers. In many cases they do not reach the targeted group(s). This paper examines the trends in fertiliser subsidy and issues of equity in its distribution between farmers and the industry, across regions/states, crops and different farm sizes. The study shows that fertiliser subsidy is more concentrated in a few states and interstate disparity in its distribution is still high though it has declined over the years. A fair degree of equity exists in the distribution of fertiliser subsidy among farm sizes. Based on the results, this paper justifies fertiliser subsidies and questions the rationale for a direct transfer of subsidy to farmers.


Fertiliser Subsidy in India: Who Are the Beneficiaries?

Vijay Paul Sharma, Hrima Thaker

There is a general view in academic and policy circles that fertiliser subsidies are concentrated geographically on a relatively small number of crops and producers. In many cases they do not reach the targeted group(s). This paper examines the trends in fertiliser subsidy and issues of equity in its distribution between farmers and the industry, across regions/states, crops and different farm sizes. The study shows that fertiliser subsidy is more concentrated in a few states and interstate disparity in its distribution is still high though it has declined over the years. A fair degree of equity exists in the distribution of fertiliser subsidy among farm sizes. Based on the results, this paper justifies fertiliser subsidies and questions the rationale for a direct transfer of subsidy to farmers.

Vijay Paul Sharma ( and Hrima Thaker ( are at the Indian Institute of Management, Ahmedabad.

overnments in both developed and developing countries intervene in agriculture with a view to achieving a wide range of economic and social objectives. The reasons for government intervention are diverse and varied. Some of the oftcited reasons for intervention are self-sufficiency, employment creation, support to small-scale producers for adopting modern technologies and inputs, reduction of price instability and improvement of the income of farm households. This intervention can take a number of forms such as import-export policies and domestic policies like price support programmes, direct payments, and input subsidies to influence the cost and availability of farm inputs like credit, fertilisers, seeds, irrigation water, etc.

Of all the domestic support instruments in agriculture, input subsidies and product price support are the most common. Various benefits are cited in justifying input subsidies: economic, environmental and social (World Bank 2008). Input subsidies can bring economic benefits to society but can also be a major cause of negative environmental externalities when they promote excessive use of fertilisers, agrochemicals and irrigation water. Inputs like fertilisers, irrigation water and electricity have a significant share in agricultural subsidies in India and fertiliser subsidy has attracted much attention of policymakers, researchers, and politicians in the recent past. One of the most contentious issues surrounding fertiliser subsidies in India is how much of what is paid out actually finds its way into the pocket of the farmer, and how much is siphoned away by the fertiliser companies. There has also been a debate about the issue of real beneficiaries of these subsidies (small vs large farmers, well-developed vs less developed regions, etc).

This paper focuses primarily on two issues. One, whether fertiliser subsidy is going to the farmers or to the industry and two, is there equity in the distribution of fertiliser subsidy across regions, crops, and different farm sizes. Section 1 of this paper describes the trends in fertiliser subsidies in India while Section 2 deals with the issue of beneficiaries of fertiliser subsidy and interstate, inter-crop and inter-farm size disparity in fertiliser subsidy. The final section sums up the findings of the paper and raises some policy issues.

1 Trends in Fertiliser Subsidies

Both the intensity of fertiliser usage in terms of nutrients per hectare area and the extent of fertilisation as measured by the ratio of fertilised area to total cropped area in many developing countries including India are lower than that in developed countries. However, fertiliser use has been and will continue to be a major

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factor in the increasing agricultural production and productivity. Typically, very few countries, even advanced ones, have relied entirely on the free market system to set fertiliser prices. It is, therefore, not surprising that governments in developing countries are promoting use of fertilisers through various policy instruments including subsidies. The fertiliser prices at both producer and farmer levels are determined directly or indirectly by the government in most of the countries and such government interventions generally have two basic objectives: (i) to provide fertilisers to the farmers at stable and affordable prices in order to increase agricultural production through higher fertiliser use, and (ii) to encourage domestic production by allowing fertiliser producers a reasonable return on their investments.

The Indian fertiliser industry has come a long way since its early days of post-independence era. India today is one of the largest producers and consumers of fertilisers in the world. India’s production in terms of nitrogen and phosphorus nutrients reached a level of 15,960 thousand tonnes in 2006-07 from 38.7 thousand tonnes in 1951-52. Similarly, consumption of fertilisers in terms of nutrients (nitrogen, phosphorus, potassium (NPK)) has also grown from 65.6 thousand tonnes in 1951-52 to nearly 22,570 thousand tonnes in 2007-08 (Figure 1).

Figure 1: Trends in Fertiliser Production and Consumption in India (1951-52 to 2007-08) (‘000 tonnes) 24000

18000 12000 6000 0 Consumption Production

1951-52 1959-60 1967-68 1975-76 1983-84 1991-92 1999-2000 2007-08 Source: FAI (2008).

Figure 2: Trends in Food and Fertiliser Subsidies in India

(as % of GDP at current prices, 1990-91 to 2008-09)



4 8 21.2 0.8 Food subsidy Fertiliser subsidy

1990-91 1993-94 1996-97 1999-2000 2002-03 2005-06 2008-09

Source: Government of India (2009 and 2009a).

The Indian fertiliser industry, given its strategic importance in achieving self-sufficiency of foodgrains production in the country, has for decades, been under government control. With the objective of providing fertilisers to farmers at an affordable price and ensuring adequate returns on investments to entrepreneurs, a fertiliser policy of providing fertilisers to farmers at subsidised prices was envisaged to induce farmers to use fertilisers. In order to achieve this objective, government introduced the Retention Price cum Subsidy (RPS) scheme, a cost-plus approach, for

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Table 1: Major Subsidies in India: 1990-91 to 2008-09 (Rs crore)
Year Food Indigenous Urea Imported Urea Decontrolled Fertilisers Total Total Subsidies
1990-91 2,450 3,730 659 4,389 12,158
1991-92 2,850 3,500 1,300 5,185* 12,253
1992-93 2,800 4,800 996 5,796 11,995
1993-94 5,537 3,800 762 4,562 11,605
1994-95 5,100 4,075 1,166 528 5,769 11,854
1995-96 5,377 4,300 1,935 500 6,735 12,666
1996-97 6,066 4,743 1,163 1,672 7,578 15,499
1997-98 7,900 6,600 722 2,596 9,918 18,540
1998-99 9,100 7,473 333 3,790 11,596 23,593
1999-00 9,434 8,670 74 4,500 13,244 24,487
2000-01 12,060 9,480 1 4,319 13,800 26,838
2001-02 17,499 8,044 47 4,504 12,595 31,210
2002-03 24,176 7,790 3,225 11,015 43,533
2003-04 25,181 8,521 3,326 11,847 44,323
2004-05 25,798 10,243 494 5,142 15,879 45,957
2005-06 23,077 10,653 1,211 6,596 18,460 47,522
2006-07 24,014 12,650 3,274 10,298 26,222 57,125
2007-08 31,328 12,950 6,606 12,934 32,490 70,926
2008-09 (RE) 43,627 16,517 10,981 48,351 75,849 1,29,243

*Includes Rs 385 crore fertiliser subsidy given to small and marginal farmers. Source: Government of India (2009).

nitrogenous fertilisers in November 1977 and extended this to complex fertilisers in February 1979. Under the RPS the retail price of fertilisers was fixed and was uniform throughout the country. The difference between the retention price (adjusted for freight and dealer’s margin) and the price at which the fertilisers were sold to the farmer was paid back to the manufacturer as subsidy. The RPS did achieve its objective of developing a large domestic industry, achieving near self-sufficiency in fertiliser production and increasing consumption of chemical fertilisers but it was not free from criticism of fostering inefficiency leading to a huge burden of subsidies.

Towards Reform of the Price Policy

The mounting burden of subsidies compelled the policy planners to make a serious attempt to reform the fertiliser price policy to rationalise the fertiliser subsidy. As part of economic reforms initiated in early 1990s, the government decontrolled the import of complex fertilisers such as di-ammonium phosphate (DAP) and muriate of potash (MOP) in 1992, and extended a flat-rate concession on these fertilisers. But, urea imports continue to be restricted and canalised.

Based on the recommendations of various committees including the High Powered Fertiliser Pricing Policy Review Committee (HPC) and the Expenditure Reforms Commission (ERC), a New Pricing Scheme (NPS) for urea units was implemented in a phased manner from April 2003 with an objective to bring transparency, uniformity, and efficiency, and reduce the cost of production. Similarly, based on the recommendations of the Expert Group on P and K fertilisers, a policy for phosphatic and potassic fertilisers has been implemented.

The main objective of all policy interventions has been to contain and target fertiliser subsidies. However, estimates of fertiliser subsidy as per the central government budgets over the years in the post-reforms era show that fertiliser subsidy has increased significantly. Table 1 (p 69) presents the estimates of major subsidies including food and fertiliser subsidies in the post-reforms period (1991-92 to 2008-09). It is evident from the table that total subsidies have increased from Rs 12,158 crore in 1990-91 to Rs 1,29,243 crore in 2008-09, an increase by 10.6 times. The fertiliser subsidy has increased from Rs 4,389 crore in 1990-91 to Rs 75,849 crore in 2008-09 representing an increase of over 17 times. As a percentage of the gross domestic product (GDP), this represents an increase from 0.85% in 1990-91 to 1.52% in 2008-09 (Figure 2, p 69). The fertiliser subsidy in India as a percentage of the GDP varied from 0.47 in 2002-03 to 1.52 in 2008-09. The total food subsidy has jumped to Rs 43,627 crore in 2008-09 from 2,450 crore in 1990-91, about an 18-fold increase in less than two decades in absolute terms. But measured in terms of percentage of GDP, the burden of food subsidies in India is much less than that of many other developing countries. The food subsidy in India as percentage of the GDP has varied from 0.41 in 1992-93 to 1.02 in 2002-03, and on an average has remained at 0.66 over the last 19 years.

During the 1990s (1990-91 to 2000-01), fertiliser subsidy accounted for about 47% of the total subsidies and share of food subsidy was 35.1% (Figure 3). In the 2000s (2001-02 to 2008-09), food subsidy became dominant, accounting for 49.1% of the total subsidy while fertiliser subsidy accounted for 39.5%. However, during the last three years, fertiliser subsidy has taken the largest share and accounted for 58.7% of total subsidies in 2008-09.

Table 2: Concentration of World Fertiliser Production, Consumption and Trade


Product/ Nutrients Countries % Share of Top 10 in World


N China (34.8%), India (15.5%), US (12.4%), Pakistan (2.8%), Indonesia (2.8%) 78.9

P China (31.5%), India (15.8%), US (11.3%), Brazil (9.7%) Pakistan (2.7%) 80.3

K China (24.0%), US (17.3%), Brazil (15.2%) India (9.8%), Malaysia (3.9%) 81.3

N+P+K China (32.2%), India (14.6%), US (13.0%), Brazil (6.5%), Indonesia (2.5%) 78.1


N China (26.9%), India (8.8%), Russia (7.7%), US (6.0%), Indonesia(3.6%) 66.6

P US (21.0%), China (18.5%), Morocco (8.4%), Russia (7.4%), India(5.5%) 73.8

K Canada (39.6%), Russia (12.7%), Belarus (11.1%), Germany (8.7%), US (5.6%) 95.0

N+P+K China (24.3%), Canada (10.4%), Russia (9.7%), US (9.5%), India (7.6%) 75.9


Urea China (16.1%), Russia (12.7%), Saudi Arabia (9.4%), Ukraine (9.3%), Qatar (7.7%) 77.0

Ammonia Trinidad (25.2%), Russia (18.7%), Ukraine (7.6%), Indonesia (7.3%), Canada (5.1%) 81.1

MAP and US (33.8%), China (21.1%), Russia (19.2%), Morocco (9.0%), DAP Tunisia (5.3%) 98.8

Potash Canada (38.6%), Belarus & Russia (36.3%), Germany (11.2%), Israel (7.6%), Jordan (3.7%) 100.0


Urea India (18.0%), US (17.5%), Brazil (6.1%), Thailand (4.9%), Turkey (4.4%) 64.8

Ammonia US (40.5%), India (9.2%), Korea Republic (5.7%), France (4.3%), China (3.9%) 77.4

MAP and India (15.5%), Brazil (15.1%), Pakistan (7.6%), Argentina DAP (6.6%), Canada (4.5%) 66.4

Potash China (15.1%), US (12.7%), Brazil (11.5%), India (6.4%), Malaysia (2.9%) 57.7

Source: Agrium (2009).

Figure 3: Trends in Food and Fertiliser Subsidies in India

(as % of total subsidies, 1990-91 to 2008-09)

Food subsidy





40 0





Fertiliser subsidy



1990-91 1993-94 1996-97 1999-2000 2002-03 2005-06 2008-09

Sources: Government of India (2009).

The above analysis shows that the volume of subsidies increased substantially during the post-reforms period (1991-92 to 2008-09). The rate of increase, however, was higher for food subsidy (compound annual growth rate of 16.9% per year) than for fertiliser (12.9%). The rate of change in the amount of subsidies was uneven over time. Total subsidies and fertiliser subsidy increased at a much faster rate during the 2000s while growth rate in food subsidies was higher (16.9%) during the 1990s compared with the 2000s (9.3%). During the 2000s, fertiliser subsidy growth has increased significantly (27.7%) as against 12.9% during the 1990s, because international prices of fertilisers, raw m aterials, feedstock and intermediates increased substantially (and yet fertiliser farm gate prices remained constant in the country) since 2002 in general but more so during the last two to three years.

Who Benefits from the Fertiliser Subsidy?

There is a debate about whether the fertiliser subsidy benefits the farmers or the fertiliser industry (Gulati 1990; Gulati and Narayanan 2003). Furthermore, the benefits of fertiliser subsidy are heavily tilted towards the large farmers growing water-intensive crops like rice, sugar cane, wheat and cotton in a handful of states.

As per the estimates by Gulati and Narayanan (2003), the share of farmers in the fertiliser subsidy increased from 24.54% in the triennium average ending (TE) 1983-84 to 75.62% in TE 1995-96 with an average share of 67.5% for the period 1981-82 to 2000-01 and the rest went to the fertiliser industry. These estimates have been computed by comparing subsidy estimates through import parity price (IPP) and farm gate prices of fertilisers with the amount of subsidy given in the central government budget. Some of the recent policy announcements like the intention of the government to move to a system of direct transfer of subsidy to the farmer are based on such findings which are based on unrealistic assumptions. For example, the study assumes that India’s entry into the world fertiliser market as an importer would not affect world prices and that world fertiliser markets are perfectly competitive. However, both the assumptions are not valid and we discuss these assumptions in greater detail with empirical data in the following section.

World Fertiliser Market

First, when studying prices and price determination in any industry, one usually looks to a body of economic theory called

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Table 3: Market Power of Top Five Global industrial organisation Fertiliser Companies

and relevant empirical

Company Market Power Nitrogen (N) Phosphate (P) Potash (K) studies to help provide

Yara ++++ ++ + answers. In perfect mar-

Mosaic ++ ++++ +++ kets, prices will be deter-

Agrium +++ ++ ++ mined by the forces of

PotashCorp ++ ++ ++++ supply and demand, but Kali and Salz group ++ + ++

the international fertiliser

++++ very strong presence; +++ strong; ++ low; + no market presence. market is not a perfect
Source: Arovuori and Karokallio (2009). market. Table 2 (p 70) in
dicates the level of con

centration in the industry in 2007-08. The top five fertiliser consumers, namely, China, India, the United States (US), Brazil and Indonesia, accounted for nearly 70% of fertiliser consumption while the top five producers (China, Canada, Russia, the US and India) controlled about 60% of world fertiliser production.

Exports of potash and DAP and mono-ammonium phosphate (MAP) are highly concentrated in a few countries and the top six exporters (Canada, Belarus, Russia, Germany, Israel and Jordan) control 97.4% of world exports in case of potash and 88.4% in MAP and DAP. The share of top five urea exporters is 55% and in case of ammonia they control about 64% of the world exports. Imports of fertiliser products are relatively diversified as the top five importers of urea account for about 51% of the world imports while in the case of MAP, DAP and potash it is nearly 50%. The results clearly show that the world fertiliser market is concentrated.

The world fertiliser markets have always been dominated by a small number of buyers and sellers. The five largest fertiliser companies in the world are Yara (Norway), Mosaic (US), Agrium (Canada), PotashCorp (Canada) and The Kali and Salz Group (Germany), which accounted for about 27% of the total production in 2002 and increased their share to about 33% in 2007 (Table 3). Yara is global leader in nitrogen fertilisers with an annual production capacity of 8 million tonnes of ammonia, 6 million tonnes of nitrates and 6 million tonnes of NPK, controlling more than one quarter of global ammonia trade (Yara 2009).

The Mosaic Company, which was formed in 2004 through a business combination of IMC Global Inc. and the crop nutrition business of Cargill, is the world’s top producer of phosphates, with an annual capacity of about 9.4 million tonnes, larger than the next three largest producers combined. Mosaic’s potash production capabilities are the second largest in the world, with an annual capacity of approximately 10.4 million tonnes. Potash-Corp is the largest potash company holding about 22% of global capacity and 75% of the world’s excess capacity.

There have been some changes in the shares of different players but still a few players control the market. The question arises as to the degree of competitive pricing in the industry, or if there is some monopoly profit in the system. In other words, to what extent are prices (and profits) above what they would be in a competitive market characterised by many buyers and sellers, where prices are determined by forces of supply and demand, and industry profits are “normal”? Apart from the level of prices in the industry, there is also the question of spatial prices, which is important in the fertiliser industry because farmers constitute

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a geographically dispersed market. Fertiliser prices can be extremely variable, and this raises the question of what price dynamics are at work that results in such price variability. Fertiliser demand is a derived demand, which in the developed countries is price inelastic while in developing country markets, demand is price elastic, such as in major markets like China and India.

World Fertiliser Prices

The prices of urea, the main nitrogen product traded and consumed, have varied widely both in absolute and in relative terms over the last two decades. The price of urea varied from about $70 per tonne in July-December 1998 to $865 in July-September 2008 (Table 4). The coefficient of variation was quite high (63.5%) between 1990 and 2008. The average free on board (fob) price during the decade of 1990s was $135 and it increased significantly ($260/tonne) during the 2000s.

Table 4: Trends in International Prices of Urea, DAP and MOP ($/Tonne Product Bulk, January 1990 -September 2008)

Product Minimum Maximum Average Coefficient CAGR
of Variation (%) (%/Annum)
Urea (fob 70 865 200 63.5 2.64
Middle East) (July-Dec 1998) (July-Sep 2008)
DAP (fob 110) 1,230 270 83.6 2.77
US Gulf) (Jan-June 1993) (April-June 2008)
MOP (fob 80 945 160 70.7 2.46
Vancouver) (Jan-June 1993) (July-Sep 2008)

Source: FAI (2008).

Figure 4: Trends in Urea Imports by India and International Prices of Urea

(000 tonnes) US$/tonne)


Urea imports World Price

6000 300

5000 250

4000 200

3000 150

2000 100

1000 50


0 1993-94 1995-96 1997-98 1999-2000 2001-02 2003-04 2005-06 2007-08 Source: FAI (2008).

The price of DAP varied from about $110 in January-June 1993 to $1,230 per tonne in April-June 2008. The prices of DAP are the most volatile among three major products, namely, urea, DAP and MOP. The average fob price during the decade of the 1990s was $177 and increased significantly ($422/tonne) during the 2000s, an increase of 238%. The average price of MOP, the most common source of potassium, rose from about $175 per tonne in 2006 to $280 per tonne in 2007 and by December 2008, MOP was being sold for $870 per tonne, an increase of about 400%. The prices of MOP varied from a low of $80 per tonne in 1993 to a peak of $945 per tonne in July-September 2008. The average fob price of MOP during the decade of the 1990s was $111, which increased significantly ($282/ tonne) during the 2000s, an increase of about 258%. The above discussion clearly shows that fertiliser markets are highly concentrated and prices of fertiliser products show a wide variability.


Figure 5: Imputed Subsidiy Per Tonne of Urea Imported and Indigenously Produced

(1992-93 to 2007-08, Rs per tonne)







Subsidy/tonne of urea imported Subsidy/tonne of indigenous urea

1992-93 1995-96 1998-99 2001-02 2004-05 2007-08

Sources: FAI (2008).

India’s Position in World Markets

India is one of the largest producers and consumers of fertilisers in the world and the entry of India in world markets as an importer influences world prices significantly (Figure 4, p 71). A strong positive association exists between the world price of urea and imports of urea by India.

It has also been argued several times that the domestic urea industry is a high-cost producing industry, and therefore, import substitution strategy could be thought about. However, we need to keep in mind the nature, structure and conduct of the urea industry. In order to look at the cost structure of imported urea vs domestically produced urea, we computed per unit subsidy on imported and indigenously produced product (by dividing the total subsidy on indigenous urea by total production and total subsidy on imported urea by total imports) and the results are presented in Figure 5.

As is evident from the figure, out of 13 years between 1992-93 and 2007-08 when urea was imported, the average imputed subsidy per tonne on imported urea was higher than the subsidy on indigenously produced urea in nine years. Likewise, the share of subsidy on imported urea has also increased significantly during the past few years (Figure 6). For example, the share of subsidy on imported urea was 4.6% in 2003-04 and it increased to about 40% in 2008-09 and is estimated to further increase to 47.6% during 2009-10. These trends show that international prices of urea were not always lower than the domestic cost of production. However, this argument does not justify the existence of highcost producing units.

The total weighted average group concession on urea was Rs 9,738 per tonne, the weighted average concession for gas-based units was Rs 6,823 per tonne, Rs 15,724 per tonne for naphthabased plants, Rs 11,430 per tonne for furnace oil/low sulphur heavy stock (FO/LSHS)-based units and Rs 9,272 per tonne for mixed feedstock units in July 2005 (Government of India 2007a). The IPP of urea has ranged from about Rs 11,096 per tonne in July-September 2005 to Rs 35,789 per tonne during July-September 2008 and has shown an increasing trend during the past few years (Government of India 2009b). Since the average cost of production of urea in general and gas-based units in particular has been low compared with the IPP, it is therefore advisable to strengthen domestic production capacity. It would help in

72 attaining self-sufficiency in urea production and provide a cushion against the highly volatile world urea market.

The government has encouraged production of urea based on gas as feedstock because of its efficiency over other feedstocks but there is need to ensure availability of gas for fertiliser sector due to competing uses of gas (Figure 7). From the mid-1990s, share of gas supplied to the fertiliser sector has reduced significantly (42% in 1995-96 to about 27% in 2006-07) despite initial allocation to meet the full requirements. Consequently, gas-based units have started facing a supply shortage and had to meet the shortfall using naphtha. Against the total requirement of 36.33 million metric standard cubic metres per day (MMSCMD) of gas for the existing gas-based fertiliser units, the actual average supply was 27.29 MMSCMD, a shortfall of about 24.8%.

Figure 6: Share of Subsidy on Imported and Indigenous Urea in Total Subsidy on Urea

(1992-93 to 2009-10 (BE), % share)

0 20 40 60 80 100 120 Urea imported Urea indigenous

1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09

Sources: FAI (2008). Figure 7: Natural Gas Allocation for Fertiliser and Energy Sectors (1991-92 to 2007-08, %)





20 Others
0 1991-92 1994-95 1997-98 2000-01 Source: FAI (2008). 2003-04 2006-07
Direct Transfer of Subsidy to Farmers

With a shift from the earlier cost-plus based approach to IPP, the Indian fertiliser industry has been exposed to the world competition and only efficient units would survive in the brave world of trade liberalisation and globalisation. Since the basic notion of about onethird of subsidy going to the fertiliser industry does not hold true, the policy of direct transfer of subsidy to farmers is neither desirable nor practically implementable. It would be difficult to ensure that direct transfer of subsidy to millions of farmers is actually used by farmers for only buying fertiliser and there are no leakages in the transfer of subsidy. If the subsidy is not used for fertiliser, it might adversely affect agricultural production in the country. Under the changed scenario, it is advisable to route the subsidies through the existing mechanism which is easy to monitor as well as ensure u sage

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of fertilisers by all categories of farmers. Therefore, direct transfer Table 6: Pattern of Fertiliser Use Intensity by Farm Size in India
of subsidy to farmers is not a right policy decision. However, a new Marginal Small Semi-medium Medium Large All Households
nutrient-based pricing policy instead of product pricing regime for Fertiliser consumption per hectare of gross cropped area (kg) 1991-92 72.2 65.5 61.7 56.3 46.0 60.7
fertilisers is a welcome step as it would ensure balanced application 1996-97 103.8 82.6 75.3 68.1 51.1 77.1
of nutrients and growth of fertiliser industry. 2001-02 126.2 100.6 88.8 75.8 55.9 92.6
Fertiliser consumption per hectare of fertiliser area (kg)
2 Equity Issues in the Distribution of Fertilisers 1991-92 113.4 104.6 101.3 97.0 98.1 102.8
Understanding who benefits from fertiliser subsidies is important 1996-97 162.1 131.8 123.9 118.6 113.6 131.1
not only to determine the fairness of policy, but also to find out how policy changes farmers’ behaviour. There is a general view in policy 2001-02 164.7 134.7 122.8 113.3 108.4 131.7 Source: Government of India (2007 and 2008).
and academic circles that the benefits of fertiliser subsidy are cor- Table 7: State-wise Fertiliser Use Per Hectare of Gross Cropped Area by Size of Holding:
nered by powerful interest groups, that subsidies are concentrated geographically, and they are concentrated on relatively few crops 2001-02 (kg/ha) States Marginal Small Semi-medium Medium Large All Households Andhra Pradesh 171.1 149.0 139.0 128.1 109.6 146.7
and on relatively few producers. Therefore, there is a need to ex- Assam 50.4 29.9 24.4 16.1 3.8 30.7
amine the fertiliser subsidy distribution patterns to assess whether Gujarat 104.1 83.0 72.8 59.0 40.4 70.0
the policy benefits all regions and categories of farmers. In this sec- Haryana 145.1 126.0 132.6 132.1 118.5 130.7
tion we examine the pattern of fertiliser consumption by farm size Himachal Pradesh 61.6 55.9 52.3 47.3 38.9 55.4
groups and the issue of equity in distribution of fertiliser subsidy Jammu and Kashmir 159.4 71.6 62.4 39.2 30.4 107.9
across different states, crops as well as farm sizes. Karnataka 172.0 122.5 98.5 79.9 62.2 105.1
Table 5: Pattern of Fertiliser Consumption by Farm Size in India (1991-92 to 2001-02) Kerala 180.8 104.6 108.3 121.2 131.5 152.0
Marginal Small Semi-medium Medium Large All Madhya Pradesh 44.1 33.5 29.3 27.0 24.4 30.0
(<1 ha) (1.0-2.0 ha) (2.0-4.0 ha) (4.0-10.0 ha) (>10 ha) Households Maharashtra 143.2 109.8 92.6 82.8 63.8 101.1
Distribution of holdings (%) Orissa 65.0 56.4 55.8 60.2 63.8 59.1
1991-92 57.1 20.3 13.7 7.3 1.6 100.0 Punjab 163.3 164.3 166.7 169.5 169.9 168.6
1996-97 60.7 18.9 12.5 6.5 1.4 100.0 Rajasthan 69.3 46.9 41.9 33.4 16.3 32.6
2001-02 64.0 18.2 11.0 5.6 1.2 100.0 Tamil Nadu 173.8 140.6 137.4 128.6 90.2 148.6
Share in gross cropped area (%) 1991-92 17.3 19.6 23.8 25.8 13.5 100.0 Uttar Pradesh 120.4 109.3 104.5 95.0 83.5 109.9
1996-97 19.0 19.1 23.5 25.1 13.3 100.0 West Bengal 130.2 137.5 139.2 107.5 112.3 133.0
2001-02 22.3 20.3 22.8 22.9 11.7 100.0 All India 126.2 100.6 88.8 75.8 55.9 92.6
Proportion of fertilised area to gross cropped area (%) Source: Government of India (2008).
1991-92 63.6 62.6 60.9 58.0 46.9 59.1 a ccounted for over one-third of operational area, consumed 25.9%
1996-97 64.1 62.7 60.8 57.4 45.0 58.8 of total fertiliser used in the country in 2001-02.
2001-02 77.1 74.2 71.3 65.1 49.7 69.2 Share in total fertiliser consumption (%) 1991-92 20.6 21.1 24.2 23.9 10.2 100.0 In 2001-02, over 77% of the gross cropped area was fertilised on marginal holdings while nearly 50% of the area was fertilised
1996-97 25.6 20.4 23.0 22.2 8.8 100.0 on large farms. An inverse relationship between farm size and
2001-02 29.9 22.1 22.1 18.9 7.0 100.0 proportion of fertilised area to gross cropped area was witnessed
Source: Government of India (2007 and 2008). during all the years.
The intensity of fertiliser use was significantly higher on small
Pattern of Fertiliser Consumption by Farm Size and marginal farms compared to large farms (Table 6). The aver-
Table 5 shows farm size wise consumption of fertilisers in India in age fertiliser consumption per hectare of gross cropped area was
1991-92, 1996-97 and 2001-02. As is evident from the table, the the highest (126.2 kg) on marginal holdings and the lowest on
share of small and marginal farmers in total operational holdings large farms (55.9 kg) in 2001-02. A similar trend was observed
increased from 77.4% in 1991-92 to 82.2% in 2001-02 while the between 1991-92 and 1995-96. Moreover there has been a signifi
share of large holdings declined marginally from 1.6% to 1.2%. cant increase in fertiliser intensity on all farm size holdings dur-
Medium and large holdings (with holding size of more than 4 hec ing the period 1991-92 to 2001-02. However, the increase was the
tares) with a share of 6.8% used just over one-fourth of the total largest (74.8%) on marginal farms (from 72.2 kg/ha in 1991-92 to
fertiliser consumed in the country in 2001-02. In contrast, the 126.2 kg/ha in 2001-02), followed by small holdings (53.7%) and
small and marginal farmers, which constituted about 82% of total the lowest (21.4%) on large farms.
holdings, consumed 52% of total fertilisers. The share of small and At the state level, almost a similar trend of inverse relationship
marginal farmers in total operational holdings increased by 4.8% between farm size and intensity of fertiliser use was observed
between 1991-92 and 2001-02 but their share in total fertiliser use (Table 7). The only exception was the state of Punjab, where large
increased by over 10%. However, if we compared the relative farms showed marginally higher fertiliser use intensity (169.9 kg/
shares of different farm size groups in total operational area and ha) compared with small (164.3 kg/ha) and marginal farms (163.3
fertiliser use, the scenario is completely changed. In 2001-02, kg/ha) in 2001-02. The average fertiliser consumption was the
small and marginal farmers accounted for 42.6% of area operated highest in Punjab, followed by Kerala (152 kg/ha), Tamil Nadu
but showed grounds for 52% of total fertiliser consumption in the (148.6 kg/ha) and Haryana (130.7 kg/ha) and the lowest was in
country. On the other hand, medium and large farmers, which Madhya Pradesh (30 kg/ha).
Economic & Political Weekly march 20, 2010 vol xlv no 12 73
State-wise Distribution of Fertiliser Subsidies

Since data on state-wise fertiliser subsidies is not available, an indirect method was used to compute state level subsidies. In

o rder to calculate subsidy on nitrogenous fertilisers in major states, we multiplied the actual use of urea in the state with the national subsidy rate by taking weighted average of domestically produced and imported urea usage and subsidies (Rs/tonne). While in case of P and K fertilisers we could not compute statewise subsidies using the same methodology as concession rates of P and K fertilisers varied quite frequently and the amount of subsidy calculated by this method was significantly different from the total concession on P and K fertilisers reported in the budget. Hence, we first computed per unit fertiliser subsidy on decontrolled P and K fertilisers by dividing total concession paid on these fertilisers by total consumption of P and K fertilisers in the concerned year and multiplying it with total P and K consumption in the concerned state. In this case our assumption is that fertiliser subsidy is distributed in proportion to fertiliser used. The results are presented in Table 8.

As the table shows, more than half of the total fertiliser subsidy is cornered by the top five states, namely, Uttar Pradesh, Andhra Pradesh, Maharashtra, Madhya Pradesh and Punjab. Most of these states grow fertiliser-intensive crops such as rice, wheat,

cotton and sugar cane.

Table 8: Share of Major States in Total Fertiliser Subsidy in India, 1992-93 to 2007-08 (in %) The share of these five

State 1992-93 1999-2000 2007-08 states in 1992-93 was
Uttar Pradesh 23.2 19.5 17.5 about 60%, which de-
Andhra Pradesh 10.6 10.8 11.3 clined to 55.8% in 1999-
Maharashtra 8.5 10.3 10.2 2000 and further to
Madhya Pradesh PunjabGujarat KarnatakaWest Bengal Bihar 6.2 11.6 5.5 4.2 5.2 6.0 6.6 8.6 5.2 6.2 6.7 5.8 7.8 7.7 7.0 6.5 6.4 6.2 54.5% in 2007-08. Other major beneficiary states were Gujarat, Karnataka, West Bengal, Bihar, Haryana and Tamil Nadu.

Haryana 5.8 5.3 5.5 Their share in the total

Tamil Nadu 5.0 5.4 4.8 subsidy has increased

Rajasthan 4.2 4.7 4.4 from 31.7% in 1992-93 to

Orissa 1.6 2.0 1.9 36.4% in 2007-08. The

Assam 0.6

0.2 1.0 share of less developed Kerala 0.7 1.0 0.9

states like Rajasthan,

Others 0.9 0.5 0.4

Orissa, Assam, Jammu

Jammu and Kashmir 0.4 0.4 0.4

and Kashmir and

Himachal Pradesh 0.3 0.2 0.2

Himachal Pradesh was

Coefficient of variation (%) 96.5 82.1 76.7 Source: Computed from FAI (2008). low and they accounted for only 6.7% of the total subsidy in 1992-93, which increased to about 7.9% in 1999-2000 and was the same in 2007-08. The share of major fertiliser consuming states like Uttar Pradesh, Punjab, Haryana and Tamil Nadu has declined during the last one and a half decade, while the share of agriculturally less developed states like Madhya Pradesh, Gujarat, Bihar, Rajasthan and Orissa has increased. Looking at the absolute shares of states in total fertiliser subsidy is not a good indicator because there are large variations in total cropped area among various states. Therefore, it would be appropriate to examine interstate equity in terms of average subsidy per hectare of cropped area. Punjab, Andhra Pradesh, Haryana, Tamil

Nadu, West Bengal and Table 9: State-wise Trends in Intensity of Fertiliser Subsidy (Rs/ha of gross cropped area)

Uttar Pradesh are the

States 1992-93 1999-2000 2007-08

main beneficiaries of fer-

Punjab 946 1,454 3,924

tiliser subsidy on per hec-

Andhra Pradesh 512 1,096 3,561

tare basis (Table 9). In

Haryana 607 1,164 3,476

these states, fertiliser

Tamil Nadu 430 1,104 3,307

consumption per hectare West Bengal 373 931 2,660

is significantly higher Uttar Pradesh 553 981 2,617

than the national aver-Bihar 394 774 2,432

age. Out of 17 states in-Gujarat 304 651 2,301 Karnataka 207 682 2,107

cluded in the present

Maharashtra 247 637 1,829

analysis, 10 states had

Jammu and Kashmir 242 457 1,264

less fertiliser consump-

Kerala 150 455 1,235

tion per hectare than the

Madhya Pradesh 159 334 1,213

national average during

Assam 35 206 1,143

1992-93 and 1999-2000

Himachal Pradesh 170 277 958

and this number fell to

Orissa 102 314 894

eight in 2007-08. States Rajasthan 129 322 824

like Maharashtra, Jammu India 331 703 2,083

and Kashmir, Kerala, Coefficient of variation (%) 79.3 57.1 51.9 Source: Computed from FAI (2008).

Madhya Pradesh, Assam, Himachal Pradesh, Orissa and Rajasthan had less than national average subsidy (Rs 2,083/ha) in 2007-08. The per hectare subsidy in Punjab (Rs 3,924) was more than four times compared with states like Orissa (Rs 824) and Rajasthan (Rs 894). The average subsidy on per hectare basis more than doubled between 1992-93 and 1999-2000 (from Rs 331/ha to Rs 703/ha) and almost tripled between 1999-2000 and 2007-08 primarily due to an increase in world prices of fertilisers, feedstock and intermediates.

The above discussion reveals that there is a high degree of concentration of fertiliser subsidy in a few states but over time the inequalities in the distribution of subsidy among states have declined sharply. The coefficient of variation in the share of states in total fertiliser subsidy has declined from 96.5% in 1992-93 to 82.1% in 1999-2000 and further to 76.7% in 2007-08. The coefficient of variation in per hectare fertiliser subsidy at the state level is substantially lower and has declined even more sharply from 79.3% in 1992-93 to 51.9% in 2007-08. This has happened due to improvement in rural infrastructure, irrigation facilities, increase in coverage of area under high yielding variety seeds, easy access to fertilisers, affordable prices, and shift in crop patterns towards fertiliser intensive crops in some of these less developed states during the last decade. The benefits of fertiliser subsidy are not restricted to only resource-rich states but have spread to other states also.

It is worth mentioning that the benefits of fertiliser subsidy have spread to unirrigated areas as the share of area treated with fertilisers has increased from 41% in 1996-97 to 53.5% in 2001-02 on unirrigated lands (Figure 8, p 75), while this share is substantially higher in irrigated areas (91.6% in 2001-02). Likewise, the share of unirrigated areas in total fertiliser use has also increased from 26% in 1996-97 to 30.7% in 2001-02 (Figure 9, p 75).

The per hectare fertiliser use on unirrigated lands has increased by about 42% between 1996-97 and 2001-02 (35.8 kg/ha to 50.9 kg/ha). In the case of irrigated areas, the intensity of fertiliser use is significantly higher compared with unirrigated areas

march 20, 2010 vol xlv no 12

but has increased at a lower rate (13.1%) between 1996-97 and 2001-02 (Figure 10).

It is quite evident from the above discussion that the benefits of fertiliser subsidy are not restricted to only resource-rich areas but have spread to other areas as well. The inequity in the distribution of fertiliser subsidy among states is still large but has declined over time.

Distribution of Subsidy across Crops

Table 10 shows the concentration of subsidies in 2001-02 across agricultural crops in the country. It is evident from the table that rice and wheat are the major users of fertiliser subsidy accounting for over half of the total subsidy. Rice is the biggest beneficiary receiving 32.2% of the fertiliser subsidy in 2001-02. Wheat has a 20.3% share, followed by sugar cane (6.3%). Cotton is another fertiliser intensive crop which accounted for 5.9% of the total fertiliser subsidy. Coarse cereals receive a small share of the subsidy. The farmers growing fertiliser-intensive crops like paddy, wheat, sugar cane and cotton are the major beneficiaries. So there is a high degree of concentration of fertiliser subsidies in terms of crops as four crops consume nearly two-thirds of the t otal fertiliser subsidy.

Distribution across Farm Sizes

Fertiliser subsidies are generally criticised because they are perceived to be far from universally distributed and concentrated on relatively few producers, mainly large farmers. In order to assess

Figure 8: Percentage Area Treated with Fertilisers on Irrigated and Unirrigated Land

(1996-97 and 2001-02, in %)100





0 Irrigated Unirrigated Source: Government of India (2007 and 2008).

2001-02 53.5 81.6 91.6 41.0 1996-97

Figure 9: Changes (%) in Share of Irrigated and Unirrigated Areas in Consumption of Fertilisers between 1996-97 and 2001-02

1996-97 2001-02

Irrigated 74% Unirrigated 26%
Unirrigated 30.7% Irrigated 69.3%

Source: Government of India (2007 and 2008).

whether the subsidy policy benefits only large farmers or all categories of farmers, subsidy distribution patterns across different farm size groups were analysed. We computed fertiliser subsidy on a per hectare basis as well as share of different farm size groups in total subsidy and the results are presented in Table 11.

Economic & Political Weekly

march 20, 2010 vol xlv no 12

Figure 10: Trends in Consumption of Fertilisers (N+P+K) on Irrigated and Unirrigated Land (Kg/ha) 150 120 90 60 30 0 Irrigated Unirrigated Source: Government of India (2007 and 2008).

Table 10: Concentration of Fertiliser Subsidy on Major Crops in India: 2001-02

35.8 50.9 128.8 145.7 2001-02 1996-97
Crop Total Fertiliser Total Subsidy % Share in Per Ha Fertiliser
Used (‘000 Tonnes) (Rs Lakh) Total Subsidy Use (Kg)
Paddy 5,061.7 367.5 32.2 119.4
Wheat 3,189.7 231.6 20.3 130.8
Sugar cane 989.6 71.8 6.3 240.6
Cotton 921.0 66.9 5.9 110.8
Groundnut 465.9 33.8 3.0 74.6
Jowar 443.8 32.2 2.8 60.0
Bajra 304.3 22.1 1.9 29.0
Maize 258.4 18.8 1.6 55.8
Others 4,073.4 295.7 25.9 66.1
All crops 15,707.8 1140.4 100.0 92.6
Computed from FAI (2008) and Government of India (2008).
Table 11: Fertiliser Subsidy on Different Farm Size Holdings in India
(1996-97 and 2001-02)
Farm Size (Ha) Subsidy Per Unit Ratio of Subsidy Share (%) in Total
Area (Rs/Ha) to All Households Fertiliser Subsidy
1996-97 2001-02 1996-97 2001-02 1996-97 2001-02
Marginal (<1.00) 550.7 916.2 134.8 224.2 25.6 28.3
Small (1.00-1.99) 437.8 730.4 107.1 178.7 20.4 23.0
Semi-medium (2.00-3.99) 399.1 644.7 97.7 157.8 23.0 23.3
Medium (4.00-9.99) 360.9 550.3 88.3 134.7 22.2 19.1
Large (t10.00) 271.4 405.8 66.4 99.3 8.8 6.3
All households 408.6 672.3 100.0 164.5 100 100

Government of India (2007 and 2008).

It can be seen from the table that there is an inverse relationship between farm size and average subsidy per hectare. Per hectare subsidy on marginal farms was more than double compared with large farms. The average subsidy was the highest (Rs 916.2/ ha) on marginal farms and the lowest on large farms (Rs 405.8/ ha). The share of marginal farmers in total fertiliser subsidy in 2001-02 was the highest (28.3%), followed by small farms (23%) and the lowest was on large farms (6.3%). The share of small, marginal and semi-medium farms has increased between 1996-97 and 2001-02 while the share of medium and large farms has declined. The results clearly show that the fertiliser subsidy is distributed more equitably among different farm sizes compared with its crop-wise and state-wise distribution.

It may be concluded from the above discussion that there is a fair degree of inter-farm equity in the distribution of fertiliser consumption. However, it would be useful to examine changes in equity in fertiliser consumption over time. In order to investigate this issue, Gini coefficients were computed for the years 1991-92, 1996-97 and 2001-02 and are given in Figure 11. The Gini coeffi-unrealistic assumptions is misconceived and inappropriate and cient is a measure of statistical dispersion most prominently used its adverse effects outweigh the perceived benefits. as a measure of inequality of income distribution. It is defined as On the issues of whether fertiliser subsidy is distributed equia ratio with values between 0 and 1. A low Gini coefficient indi-tably across crops, states, and farm classes, our results indicate cates more equal distribution, while a high Gini coefficient indi-that fertiliser subsidy is concentrated in a few states, namely, cates more unequal distribution. As the figure makes clear, be-U ttar Pradesh, Andhra Pradesh, Maharashtra, Madhya Pradesh, tween 1991-92 and 2001-02, inequality in fertiliser consumption and Punjab. Interstate disparity in fertiliser subsidy distribution across different farm size groups went down from 0.47 to 0.39, is still high though it has declined over the years. Rice, wheat, which is a positive development. sugar cane and cotton account for about two-thirds of the total

Figure 11: Gini Coefficient in 1991-92 and 2001-02 (Input Survey)

0.5 0.4 0.3 0.2 0.1 00.47 0.44 0.39

fertiliser subsidy. However, we found that the fertiliser subsidy is

more equitably distributed among farm sizes. The small and marginal farmers have a larger share in fertiliser subsidy in comparison to their share in cultivated area. The benefits of fertiliser subsidy have spread to unirrigated areas as the share of area treated with fertilisers has increased from 41% in 1996-97 to 53.5% in 2001-02 on unirrigated lands and the share of unirrigated areas in total fertiliser use has also increased during the corresponding period. A reduction in fertiliser subsidy is, therefore, likely to have adverse impact on farm production and income of small and marginal farmers and unirrigated areas (about 60%) as they do not benefit from higher output prices but do benefit from lower input prices. Thus, the results justify the fertiliser subsidies and

1991-92 1996-97 2001-02 question the rationale for direct transfer of subsidy to farmers. Calculations are based on distribution of holdings ranked by their fertiliser consumption shares.


3 Concluding Observations and Policy Implications The government’s move in early 2010 to shift to a nutrient-based The importance of fertilisers in agricultural production has made the subsidy (NBS) on decontrolled phosphatic and potassic fertilisers promotion of fertiliser use an important aspect of national policy in and to provide additional subsidy for subsidised fertilisers carrying India. Almost all developing countries including India have, at vari-other secondary and micro nutrients is a welcome step. Under the ous times and to different degrees, subsidised fertilisers. Fertiliser NBS regime, the subsidy on subsidised fertilisers will remain fixed subsidies were considered particularly important in inducing farm-while their retail prices at the farmgate level will be decided by ers to adopt high yielding varieties, which often depended heavily market forces. If prices of decontrolled P and K fertilisers remain on fertilisers, and they have been successful in this regard. There-affordable, it would lead to balanced use of fertilisers and provide fore, with increase in fertiliser use over time, the subsidy has also in-a wider choice of fertiliser products to farmers. However, intercreased. In India, fertiliser subsidies increased rapidly during the national prices of P and K fertilisers and feedstock/raw materials post-reforms period and peaked in the second-half of 2000s. are highly volatile which might lead to more volatility and perhaps

The general perception that about one-third of fertiliser subsidy to an increase in farmgate prices of these fertilisers. In addition, goes to the fertiliser industry is misleading because the underlying urea will continue to be under government control with a 10% inassumptions do not hold true. The world fertiliser markets and crease in its price. Therefore, these policy interventions might lead trade-flows are highly concentrated and volatile, and Indian im-to higher increase in P and K prices compared with urea, which ports have a significant impact on the world prices. Moreover, with would lead to imbalanced use of fertilisers (N: P: K) as was the case a shift from the earlier cost-plus based approach to IPP, the Indian post-1991 when P and K fertilisers were decontrolled but urea fertiliser industry would be exposed to the world competition, r emained under control. In order to make this policy intervention which would drive the inefficient units out. The proposed policy effective, there is a need to specify a price band for P and K fertilisof direct transfer of fertiliser subsidy to farmers that is based on ers so that prices do not go beyond the reach of Indian farmers.

References – (2007a): “Report of the Working Group on Ferti-Quarter July 2008 to September 2008 and Earlier Agrium (2009): “Agrium’s 2008-09 Fact Book”, Agri

lisers for Eleventh Five-Year Plan (2007-12)”, Plan-Quarters”, Department of Fertilisers, Ministry of um Inc, Calgary, Alberta, Canada.

ning Commission, New Delhi, pp 127. Chemicals and Fertilisers, New Delhi.

– (2008): “All India Report on Input Survey 2001-Gulati, Ashok and Sudha Narayanan (2003): The Subterns and Competition in the World Fertiliser Mar-Arovuori, A and H Karikallio (2009): “Consumption Pat

02”, Agriculture Census Division, Department of sidy Syndrome in Indian Agriculture (New Delhi: kets”, paper presented at the 19th Symposium of the

Agriculture and Cooperation, Ministry of Agricul-Oxford University Press). International Food and Agribusiness Management ture, New Delhi. Gulati, Ashok (1990): “Fertiliser Subsidy: Is the Cultiva-Association, Budapest, Hungary, 20-21 June 2009. – (2009): “Union Budget”, Various Issues from 1991-tor ‘Net Subsidised’?”, Indian Journal of Agricultural FAI (2008): “Fertiliser Statistics 2007-08 and Earlier 92 to 2009-10, Ministry of Finance, New Delhi. Economics, Vol 45, No 1, January-March, pp 1-11. Issues”, Fertiliser Association of India, New Delhi. – (2009a): “National Accounts Statistics”, Various World Bank (2008): “World Development Report

Government of India (2007): “All India Report on Issues from 1991 to 2009, Central Statistical 2008: Agriculture for Development”, World Bank, Input Survey 1996-97”, Agriculture Census Divi-Organisation, Ministry of Statistics and Pro-Washington DC. sion, Department of Agriculture and Cooperation, gramme Implementation, New Delhi. Yara (2009): “Yara Fertiliser Industry Handbook, No-

Ministry of Agriculture, New Delhi. – (2009b): “Import Parity Price of Urea for the vember 2009”, Yara International ASA, Norway.

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