By Pradeep S Mehta
Fertilisers contribute a large part of the cost of agriculture and the exchequer’s subsidy burden, yet, there is little thought being given to why the prices of imported fertilisers are scrambling up. It is well known that the artificially high prices of fertilisers are maintained by handful of companies operating as a cartel, which is not illegal under their home country laws. Especially as India is a very large consumer, the government could bargain for lower prices rather than asking the taxpayer to be a party to more subsidies that end up unjustly enriching foreign companies.
For years, the government has been increasing the subsidies allocated to fertilisers to enhance fertiliser use to boost agricultural production and provide food security. Unfortunately, the huge subsidy bills do not translate into a proportionately high volume of fertiliser use. During 2002-07, 88% of the reported increase in subsidies was due to the sharp rise in international fertiliser prices while only 12% was a result of enhanced consumption of fertilisers.
Reducing subsidy on a key input even as its cost goes up would lead to a higher cost of production that would then be transmitted through the supply chain, the ultimate burden of which would be borne by the consumer. The chain of events has the ultimate outcome of aggravating the already prevalent food inflationary trend in the agricultural products market. It may also present a grave contingency on the supply side when the poor farmer is unable to afford the high input prices leading to a fall in yield rates.
What complicates the fertiliser subsidy-food inflation dilemma are the market distortions in the international fertiliser market. When mulling over the fertiliser subsidy bills that put a drain on the Union Budget , the anti-competitive practices prevalent in the fertiliser market are often left unheeded. The world fertiliser market is not a perfectly competitive market where prices are competitively determined on the basis of demand and supply. Instead, they are reflective of the high monopoly rents of the concentrated market power of a few players.
About 70% of the world trade in two key fertilisers, potash and phosphate, is controlled by three transnational companies: Canpotex, Belarusian Potash Co and PhosChem. Canpotex is an exporter of potash and phosphate, and an offshore company for three North American firms: Agrium , Mosaic and PotashCorp. Canpotex coordinates with Belarusian Potash Co in the world market of potash formed by member companies: Belaruskali and Uralkali . PhosChem is a US-based export cartel and is the largest exporter of concentrated phosphate from North America. Last year, it exported six million tonnes of diammonium phosphate to India. PhosChem is formed by two of the three companies, PotashCorp and Mosaic, that form Canpotex.
Due to their agricultural production needs and reliance on fertiliser imports, countries such as India, China, Brazil and Australia have to buy from these transnational companies despite the high international prices set by them. India relies almost completely on import of potash and phosphate to meet its domestic demand. For 2010-11, India imported 4.5 million tonnes of muriate of potash and 6 million tonnes of diammonium phosphate the sales of both of which are subject to cartelisation in the global market.
In an ET article, Global potash trade & competition (November 25, 2010), noted competition expert Frederic Jenny highlighted the overcharge paid by India due to anti-competitive practices in the global potash market. Under a competitive scenario, the price of potash would decline from $574 per tonne in 2011 to $217 by 2015, and subsequently increase to $488 by 2020. However, in the continuing presence of fertiliser cartels , the price of potash would steadily increase from $574 per tonne in 2011 to $734 in 2020. And assuming India imports an average of 6 million tonnes of potash per year during 2011-20, the significant overcharge it would end up paying on these imports would be financed to a large extent (50-100%) from a $1.5-billion ( 68,400 crore) annual subsidy granted by the government to the department of fertilisers.
In international economic governance, subsidies are viewed as trade-distortive breeding grounds for economic inefficiency. Besides, if the burden of the huge subsidy bill being carried by Indian taxpayers is mostly paying off the monopoly rent of a few transnational companies, the case for high fertiliser subsidies seems rather weak. The best available option out of this conundrum is for India to lobby and form buyers alliances with countries such as China – which together with India accounts for 75-80% of the global trade in potash – Brazil and Australia that are similarly hit owing to their growing agricultural needs.
Such a buyer alliance with sizable leveraging power as importers in the international fertiliser market should then bargain for lowering fertiliser prices. It would not only force compliance to its demands by threatening the market dominance of supplier countries but also address the adverse anti-competitive spillover effects of the existing cartels before international fora.
The time has come to lobby against rectifying the welfare-reducing ‘beggar thy neighbour’ policies adopted by countries that continue to exempt export cartels from their domestic antitrust regulation.
The author is secretary general of CUTS International. Natasha Nayak of CUTS contributed to this article.