THE federal government last week abolished direct cash subsidy on fertiliser, touching the raw nerve of farmers. Most of the farmers’ bodies, notably Pakistan Kissan Ittehad, reacted sharply and threatened to launch protests to force the government restore the subsidy.

The farmers say the sector was put on the road to recovery largely because of the fertiliser subsidy factor. As the subsidy brought the price down, urea application went up by 25pc. The DAP off-take was even sharper at 30pc. It brought cost of production down by almost Rs1,000 per acre on the fertiliser head alone. It also led to increase in output of almost all major crops and created an additional financial cushion for farmers.

With the cash subsidy withdrawn, the farmers think the recovery has been put at risk.

International prices have gone up from $315 to $335 per tonne, and are still rising. This will reflect in prices regardless of the subsidy

Farmers also fear the domino impact of this decision: if the government has discontinued the politically sensitive cash subsidy on fertiliser, who can stop it from ending the Kissan Package, like tax concessions on other inputs like electricity charges and interest-free credit.

The officials, however, have their own study of the market forces to justify the step. To begin with, they claim that subsidy on urea had three components.

The government revised the general sales tax from 17 to 5pc, which translated into Rs187 per bag. Another source of price reduction was the direct subsidy of Rs17bn, which brought the price down by Rs156 per bag.

Third, the industry reduced the price by Rs50 per bag, as a goodwill gesture. Two components (GST revision and the industry’s reduction) still stand.

Only direct cash subsidy has been abolished because a massive increase in off-take in the last three months quickly devoured the entire financial allocation, leaving no money in this head.

Officials argue, even if the urea prices increase, it would only be Rs156 per bag. The current position of domestic stocks would not permit even that increase, even if the industry wants to.

The country has over 1m tonnes of stocks at present. They would swell by another 1-1.5m before the next application of urea in early kharif. With such a huge glut, the manufacturers would prefer to clear their stocks rather than increase the price. How can it risk withdrawing its own reduction of Rs50 bag?

For the DAP, the officials, however, concede that its prices would go up by Rs300 per bag due to subsidy withdrawal. The DAP prices have also started rising of late in the international market, and are governed by it.

The international prices have gone up from $315 to $335 per tonne, and are still rising. This will reflect in prices regardless of the subsidy.

However, the total impact of the cash subsidy withdrawal and global prices can take the cumulative price further up and magnify the increase. Official circles were mindful of the fact but ran short on money.

Both sides, it seems, have their own fears and calculations. However, the government should have simultaneously reiterated its commitment to all other provisions of the federal and provincial Kissan packages.

The industry was invited a day after the notification to debate Rs50 per bag issue where the industry was more interested in its stuck-up subsidy claims of billions of rupees with the federal government rather than Rs50 per bag reduction issue.

The farmers are threatening to take to the streets be back on the roads as a pre-emptive measure so that the government not only restores the direct cash subsidy scheme but also does not tinker with the rest of the concessionary regimen, it started with much fanfare last year.

Latest: Subsidy on fertiliser has been restored as of last Friday by PM Nawaz Sharif.

Published in Dawn, Business & Finance weekly, January 16th, 2017