KARACHI: Direct and indirect subsidies to the fertiliser industry are an ineffective policy tool in the quest to ensure low prices of essential commodities like wheat, rice, maize and sugar for low-income people, a research paper released on Monday said.

The research paper released by the Pakistan Institute of Development Economics said the government spends roughly Rs200 billion every year on subsidising the fertiliser industry — funds that have “negligible” contribution to the reduction of prices, it said.

About 84 per cent of Pakistan’s total fertiliser demand is met through local production while the gap is plugged through imports. Local prices of urea remained lower than international prices in the last 10 years mainly because of an indirect subsidy on feedstock gas, which is the primary raw material used in making fertiliser.

Call for diversion of funds towards development of production technologies, rural infrastructure

Around 80pc of the gas supplied to the fertiliser industry is for feedstock. A differential of Rs721 per million cubic British thermal units exists between feedstock and fuel stock prices. This price differential accounts for Rs150bn per annum, but does not include the tax relief to the fertiliser industry.

“In addition to these subsidies, the government also provides a subsidy of Rs1,194 per 50kg bag on imported urea. “The aggregate subsidy of the federal government to the fertiliser sector is more than Rs200bn per annum and the subsidies given by the provinces are in addition to this,” the paper said.

Pricing and profits

The retail price of a 50kg urea bag was Rs1,686 in 2020-21 after a subsidy of Rs865 per bag on feedstock gas. About 65pc of the retail price (Rs1,096 per bag) constituted the cost of production while the remaining 35pc (Rs590) was the profit that was divided among different stakeholders, including production units, the research paper said.

However, the selling price of urea would have increased to Rs2,551 per bag if the subsidy on feedstock gas amounting to Rs865 per bag was withdrawn. “This cost structure of the urea bag demonstrates that fertiliser companies are earning a certain profit from the fertiliser subsidy rather than maintaining a ‘reasonable’ threshold level of urea prices for farmers,” it said.

To establish the scope of the subsidies received by the fertiliser industry, the research paper compared this amount with the federal Public Sector Development Programme (PSDP) budget of Rs650bn for 2020-21. “If we add up other subsidies in terms of tax relief and provincial subsidies and incentives to the fertiliser industry, then it accounts for... 31pc and 22pc of federal PSDP for 2020-21 and 2021-22, respectively,” it said.

In 2020-21, the fertiliser industry generated a cumulative net profit of Rs80.4bn, which was more than half of the subsidy in terms of the feed-fuel price differential.

Published in Dawn, August 10th, 2021