Direct Cash Transfer System For Fertilisers PDF

REVIEW OF RURAL AFFAIRS
Direct Cash Transfer System for Fertilisers

Why It Might be Hard to Implement
Avinash Kishore, K V Praveen, Devesh Roy
The challenges in implementing a direct cash transfer

system for fertilisers are daunting. This paper points out
that they range from the very large number of
beneficiaries to volatile fertiliser prices, necessitating
market price indexation of cash transfers and controlling
the market power of dealers, especially in remote areas.
The imbalance in the use of different fertilisers is also a
growing problem. If designed properly, a DCT should be
accompanied by significant investment in soil testing
and the payment should be tied to balanced use of
fertilisers, including micronutrients.
The authors thank an anonymous refree of this journal for comments on

an earlier version of the paper.
Avinash Kishore (avinash.kishore@gmail.com) is a Postdoctoral Fellow
at the International Food Policy Research Institute, New Delhi,
K V Praveen (veenkv@gmail.com) is a faculty member at the
Indian Agricultural Research Institute, New Delhi and Devesh Roy
(d.roy@cgiar.org) is a research fellow with IFPRI.
54
1 Introduction
ncreasing fertiliser use has been a critical component of

the green revolution package of inputs and practices. The
adoption of high-yielding varieties, aided in part by the use
of fertilisers, is credited with ensuring cereals-based food
security in India. Importantly, over time, while fertiliser consumption continued to rise substantially, the elasticity of output with respect to fertilisers dropped sharply. While the average crop response to fertilisers was 25 kilograms of grain per
kg of fertiliser during the 1960s, this fell to 8 kg by the late
1990s (Kapur 2011). During the last decade, while fertiliser
consumption grew by 50%, the increase in foodgrains production was only 11%.
The increase in fertiliser use has come at significant costs.
While the fertiliser subsidys fiscal burden was merely Rs 60
crore in 1976-77, it shot up to more than Rs 65,000 crore in
2010-11 (Table 1, p 55). There are other important costs in the
form of long-term soil damage, straining of water resources (in
both quantity and quality), and general saturation of yields
due to application of suboptimal nutrient ratios.
Who ultimately benefits from the fertiliser subsidy remains
a matter of debate. Gulati and Narayanan (2003) assess that
much of the subsidy accrues to fertiliser producers. On the
other side, Sharma (2012) argues that with rising international fertiliser prices, a substantial portion of the subsidy
actually goes to farmers. Two lines of argument prevail on
this. One, fertilisers are consumed most heavily by middlesize and large farmers; and two, the share of small and
marginal farmers in fertiliser consumption is higher than
their share in gross cropped area, making them significant
stakeholders.
To ensure greater efficiency, cost effectiveness, and better
delivery of fertilisers, the Government of India constituted a
committee in February 2011 under Nandan Nilekani, chairman,
Unique Identification Authority of India (UIDAI). Its mandate
was to recommend a solution to provide fertiliser subsidies
through direct cash transfer (DCT). In implementing a DCT for
fertilisers, the committee suggested a phased introduction,
being aware of the challenges faced by a DCT system in India,
particularly for food and fertilisers. It stated categorically
that the success of a DCT scheme will depend on political will,
good governance, an incentive-compatible solution design,
the judicious use of technology, a structured transition plan,
meticulous project management, effective supervision, audit,
and execution.
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vol xlviii no 52
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Economic & Political Weekly
Proposed DCT for Fertilisers

The proposal is that a DCT for fertilisers be implemented in
three phases. In Phase I, a comprehensive digital map of the
fertiliser supply chain is to be produced. In Phase II, the cash
transfer is to be provided to retailers. This is to be followed by
cash transfers to farmers to purchase fertilisers in Phase III.
In mapping the fertiliser supply chain, the task force recommended creating an online database to monitor the movement
of fertilisers all the way from plants to retailers. In Phase II, the
subsidy is to be transferred directly to retailers, based on their
receipt of fertilisers from wholesalers, that is, as a function of
the stocks available with retailers. In the final phase, the DCT
to farmers hinges on the coverage of Aadhaar cards.
The committee delves into much more in Phase III by mentioning the targeting of subsidies based on the size of landholding, nature of crops (subsistence versus commercial crops),
and a ceiling on the amount of subsidy and/or fertilisers per
beneficiary. Strikingly, the recommendations do not provide
any road map to implement the extended set of objectives
(Sharma 2012).
(iii) market price/inflation indexation (to preserve purchasing

power);
(iv) supply demand parity at the local level to contain excessive market power to sellers;
(v) preservation of right incentives in production and distribution; and
(vi) conditionality related to an optimal mix of fertilisers and
the level of usage.
We discuss the issues related to these conditions for the
working of a DCT system for fertilisers, going into the finer
points in six subsections. The final section concludes and highlights policy implications. Note that we abstain from commenting on the implications of a regime change (removal of
the current system of fertiliser subsidy to producers and
moving to a DCT) on the fertiliser industry. The supply-side
effects that would bear on the prices of fertilisers have to be
assessed separately.
2 Issues Related to a DCT Scheme
2.1 Identification Issues in Phase III
Potential Roadblocks
Compared to cash transfers that the government has started

for pensions and scholarships and more recently liquefied
petroleum gas (LPG), the modalities for a DCT in fertilisers are
far more complex. In transferring pensions, money carries no
further conditions the beneficiaries are free to spend as they
choose. In comparison, the
Table 1: Central Subsidy on
All Fertilisers (Rs crore)
DCT for fertilisers is aimed at
Year
Total Subsidy Total Subsidy (Deflated
improving the purchasing
(Current)
in Constant 2005 Rs)
power only for buying ferti1976-77
60
168.92
lisers. It is also much easier
1980-81
505
1,056.69
to identify a pensioner than
1985-86
1,924
3,121.92
it is to identify a farmer
1990-91
4,389
6,073.78
1995-96
6,735
8,253.09
without committing inclu2000-01 13,800
15,554.07
sion and exclusion (or type 1
2005-06 18,460
18,460.00
and type 2) errors. Further,
2010-11 65,837
59,317.43
one should not discount that
Source: Fertiliser Association of India (2012).
the scale is much smaller
in the case of pensions or scholarships than in fertilisers,
which involves several million farmers. Even in Phase II, with
just retailers (numbers in thousands) as recipients, the scale
is large.
Most importantly, a DCT for fertilisers, much like one for
food or kerosene, has a direct interface with markets on both
the demand and supply sides. Consequently, how the market
responds, what incentives are generated for agents in the marketing chain, and what prices are realised become important
considerations.
To assess the potential of a DCT for fertilisers, it is best to
understand the preconditions for its success. They are
(i) Unique and truthful identification of the beneficiary,
the farmer;
(ii) a seamless mechanism for delivery of cash in time (owing to
time sensitivity of fertiliser use) with minimal transaction costs,
determined largely by the functioning of the banking system;
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December 28, 2013
vol xlviii no 52
India has had a tradition in social transfer schemes, both conditional and unconditional. Some examples are the Balika
Samridhi Yojana of 1997, the National Programme for Education of Girls at Elementary Level under the Sarva Shiksha
Abhiyan of 2003, the Kasturba Gandhi Balika Vidyalaya
Scheme of 2004, the Janani Suraksha Yojana of 2005, and the
Dhanalakshmi scheme of 2008. The Mahatma Gandhi National
Rural Employment Guarantee Scheme (2006), and social pension schemes (unconditional cash transfers) are other similar
initiatives (UNDP 2009).
These cash transfer programmes are targeted at specific beneficiary classes such as girl children, pregnant women, and unemployed labourers, and are run by individual ministries. The
conditions for payment of cash also help in identification.
Records from institutions such as hospitals and schools can be
used to adequately identify the beneficiaries. In some cases,
panchayats are directly involved at all stages. In comparison,
the identification of beneficiaries is far more complex in fertilisers
and the need for inter-agency coordination is much higher.
Identification of farmers is difficult, more so since the application of the usual criteria for identification in other targeted
programmes (such as below the poverty line or BPL persons)
does not work in the case of fertilisers (Kapur 2011). In India,
large numbers of eligible people are excluded from government programmes (type 1 error) because of the poor coverage
of programmes and misclassification of beneficiaries. Identification of beneficiaries in a DCT system for fertilisers is likely to
be even more difficult. An Aadhaar-based system cannot identify if a cardholder is a farmer or not. It can only help plug the
leakage due to duplicate or fake identities. It cannot cover
against shadow beneficiaries availing themselves of the benefits of a DCT. The transfer being in cash rather than in kind
aggravates this problem.
If a system based on Aadhaar cards is not likely to identify a
farmer just as it would not identify a BPL household, what
55
could be the alternatives? If land records were to be used, there

are two main issues. One, these are not necessarily accurate or
reliable; and two, tenant farmers without land records would
be left out.
Land is a state subject in the Constitution of India. The system of land records is quite complex and there are significant
differences across states as well as within states. As many as
three to four agencies are involved in dispensing land records
and validating or updating them with changes. These include
the revenue department for textual records and mutations, the
survey and settlement (or consolidation) department for maps,
the registration department for verification of encumbrances,
registration of transfer and mortgages, and the panchayat and
municipal authorities for verifications (Government of India
2008). These departments generally do not work in tandem.
Further, the records are often outdated.
Differences in tenancy regulations are another problem
(Table 2). Even in states that allow leasing out of agricultural
land, tenancy is discouraged by empowering tenants with
understanding with the department of land resources. The

funding pattern is as follows 100% central funding for computerisation of land records; 50:50 centre-state cost sharing for
survey/resurvey and updating of settlement records; 25:75
cost sharing for computerisation of registration, and 100%
central funding to UTs for the NLRMP. The entire country is to
be covered in the Twelfth Five-Year Plan period (2012-17). Notwithstanding these programmes, the success of the initiative
remains in question. Most states have not utilised the funds
released to them. Of the total funds released to all the states
and UTs, only 4.13% has been utilised till date.
Other risks include the diversion of funds (as under SRA and
ULR), and computerisation of non-updated records (under
CLR). The complexities involved in computerisation of records,
surveys and re-surveys, computerisation of registration, creation of land record management centres at block/circle levels,
and creating core geographic information services (GIS) are
high. This is because various departments have to be brought
to function in unison. The proposed legal changes such as
Table 2: Tenancy Laws in Various States

Category of States
(1) Kerala and Jammu and Kashmir

(2) Telangana area of Andhra Pradesh, Bihar, Jharkhand, Karnataka,
Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Uttarakhand and Odisha
(3) Punjab, Haryana, Gujarat, Maharashtra and Assam
(4) Andhra area of Andhra Pradesh, Rajasthan, Tamil Nadu and West Bengal
(5) In scheduled tribe areas of Andhra Pradesh, Bihar, Odisha, Madhya Pradesh
and Maharashtra
Nature of Restrictions in Tenancy Laws
Leasing out of agricultural land legally prohibited (women joint liability groups
exempted in Kerala).
Leasing out of agricultural land allowed only by certain categories of landowners
such as the disabled, minors, widows, defence personnel.
Leasing out of agricultural land not specifically banned, but tenant acquires right
to purchase the rented land after a specific period of tenancy.
There are no restrictions on land leasing, although in West Bengal only share
cropping leases are legally permitted.
Transfer of land from tribals to non-tribals even on lease basis permitted only by a
competent authority.
Source: Government of India (2008).
protected rights on rented land (Indian Banks Association

2008). The rights are either as perpetual tenants or to purchase land within a specified period. Leases in many parts are,
however, made on oral terms, subject to termination at any
time because legislation does not encourage the formal recording of tenancy.
Some states like Andhra Pradesh issue a tenant card, which
bearers can use to avail themselves of benefits from the government. However, creating a uniform methodology to recognise the rights of tenants in different states for a DCT will probably largely remain an unfulfilled task. The National Land
Records Modernisation Programme (NLRMP), implemented
recently, is a good beginning for improving the system of land
records. The NLRMP was approved by the central cabinet in
2008. The proposal was put forward by the central department of land resources, Ministry of Rural Development. Two
existing centrally-sponsored schemes, strengthening of revenue administration and updating of land records (SRA and
ULR), implemented in 1987-88, and computerisation of land
records (CLR), implemented in 1988-89, were merged to form
this programme.
The activities of the NLRMP are designed such that it could
lead to conclusive titling and strengthening the revenue
administration. Fund releases to the states and union territories (UTs) are conditional on their signing memoranda of
56
amendments to the Registration Act 1908, amendments to the

state stamp acts, and the model law for conclusive titling may
further complicate the implementation of the programme and
delay it.
Identification of beneficiaries based on land records is further
complicated by the fragmentation of holdings and tenancy.
Table 3 shows Table 3: Share of Number of Holdings under Each
the share of differ- Category in Total Operational Holdings (in %)
Category
Per Cent
Per Cent
ent categories of
Share in
Share in
1995-96
2005-06
holdings by size. It
shows a slight in- Wholly owned and self-operated 97.45 97.14
0.27
0.31
crease in the share Wholly leased-in
0.29
0.23
of both wholly and Wholly otherwise operated
1.99
2.32
partly leased-in hol- Partly leased-in
dings over time.
The number of partly leased-in holdings increased from 2.3
million to 2.33 million but the area decreased slightly from
9,00,000 hectares to 8,00,000 hectares.
Based on National Sample Survey Office (NSSO) data, partly
or wholly leased-in land comprised about 10% of the total land
area. Tables 4 and 5 (p 57) from the Ministry of Agriculture show
that marginal and small farmers contribute significantly to the
categories of wholly and partly leased-in holdings, both in numbers and in area. A figure of 33.89 in 1995-96 for the percentage share in area for marginal farmers (Table 4) implies that
December 28, 2013
vol xlviii no 52
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about 34% in the total area that is wholly leased-in is with

marginal farmers. Small and marginal classes of farmers are
those whose access to fertilisers could be the target for improvement in a DCT scheme. Hence, if identification were
based on land records, outcomes for these vulnerable sections
could worsen in terms of access to fertilisers.
To identify a beneficiary farmer, the task force envisages
constructing a database with information on landholdings and
type of crop(s) cultivated. Land sizes and cropping patterns,
however, keep changing. The changes in shares of various
classes of farmers by size in the total operational holdings are
given in Figure 1.
technology (for example, choosing organic farming using

vermi-compost).
Identification and Other Issues in Phase II
Since a nationwide database of all retailers will be prepared

in Phase I, retailers should be relatively easily to identify in
Phase II. The main complexity arises because payment is to be
made based on the stocks held by retailers rather than their
sales. This sidesteps the issue of identification of the ultimate
beneficiary, the farmer. At the end of Phase II, only the total
amount of sales will be recorded in a central database and not
who gets the fertiliser in the end.
The distribution channels for fertilisers have undergone sigFigure 1: Comparison of Share of Size Classes in the Total Operational
Holdings (in 1995-96 and 2005-06)
nificant transformations over time. They have become quite
% share in total number of operational
share in total
of operational
% share
to %holdings
number
ofnumber
operational
holdingsextensive
(2005-06)and retail outlets exist in almost all parts of the
% share toholdings
number
of operational
holdings
(1995-96)
(1995-96)
(2005-06)
country.
Fertilisers produced or imported at 200 locations in
Medium
Large
Large
Medium
5.31
Semi
1.21
1.01
6.14
the country are distributed to about 6,27,000 villages. Initially
4
Medium
Semi
11.14
Medium
only government agencies and cooperatives were involved in
12.34
fertiliser distribution. Subsequently, it was opened for private
trade in 1966. The bulk of fertiliser trade (almost 70%) now is
by the private sector. The major agencies are EID Parry and
Marginal
Small
Small
Marginal
18.64
Company, Shaw Wallace and Rallies India. A large number of
18.73
63.89
61.58
private wholesalers and retailers are involved in fertiliser marketing. Cooperatives are other major agencies handling almost
30% of the transactions. Some manufacturers have their own
outlets, usually called farmer service centres, which combine
sales of fertilisers with seeds, pesticides, and machinery under
Table 4: Share in Number and Area of Wholly Leased-in Holdings
one roof (Shrotriya 2002).1
by Size (in %)
Overall, in the current scenario, fertiliser retail near the end
Size Class
1995-96
2000-01
2005-06
Share in
Share in
Share in
Share in
Share in
Share in
points is competitive. Figures 2, 3, and Figure 4 (p 58) show the
Number
Area
Number
Area
Number
Area
number of wholesalers, retailers, and the total number of fertiliser
Marginal
73.33
Small
17.23
Semi-medium 6.59
Medium
2.38
Large
0.46
33.89
24.90
18.43
14.12
8.66
78.00
15.67
4.78
1.21
0.33
26.77
16.78
9.60
5.22
41.63
77.28
16.70
4.34
1.25
0.43
24.72
16.41
7.88
5.13
45.86
Figure 2: Number of Wholesalers, Retailers, and Net Cultivated Area

Chart Title
(in thousand hectares, in 2011-12)
12,000
10,000
8,000
Table 5: Share in Number and Area of Partly Leased-in Holdings

by Size (in %)
6,000
Size Class
1995-96
Share in
Share in
Number
Area
Marginal
54.45
Small
24.27
Semi-medium 13.40
Medium
6.37
Large
1.52
20.93
25.21
20.96
19.34
13.57
2000-01
Share in
Share in
Number
Area
2005-06
Share in
Share in
Number
Area
54.97
25.91
12.06
5.60
1.46
65.93
22.20
8.56
2.63
0.68
27.09
28.47
17.47
12.73
14.24
33.20
27.74
17.57
10.51
10.98
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4,000
2,000
0
East
North East
North
South
West and Central
Figure 3: Number of Retailers across Zones Normalised by Cultivated Area

Average
numberper
of 1,000
retailers
per 1000 hectare
2011-12 (Average number
of retailers
hectare)
2.5
Kalaiselvi (2012) categorises states based on spread and

concentration of cropping patterns over time. Most southern
states show an increasing trend towards spread whereas
the northern and eastern states have moved in the opposite
direction. Only Kerala, Jammu and Kashmir, and Rajasthan
have maintained the status quo. The proposed system of
identification thus has an inherent complexity because of
changing holding sizes and crop choices. The rules for a DCT
need to be such that they do not distort incentives for growing
some crops or hinder adoption of low fertiliser-intensity
Net cultivated
area (000 ha)
Number of
retailers
Number of
wholesalers
December 28, 2013
vol xlviii no 52
2
1.5
1
0.5
0
East
North East
North
South
West and Central
57
sale points in India and the spread of the retailers across zones.
Only in the north-eastern states is the number of retailers and
wholesalers comparatively small.
Further, the number of fertiliser sale points across zones is
higher than the number of retailers. Thus, competition is likely
to be greater at the points of sale than at the retailers level.
The number of sale points per 1,000 hectares of net cultivated
area is highest in the north zone and lowest in the south
(Figure 4). Interestingly, the share of the private sector in
total fertiliser sale points (76.7%) is significantly higher than
cooperatives and other agencies (23.3%).
Figure 4: Number of Fertiliser Sale Points Per 000 Hectare Net Cultivated
Area
All India
1.92
3.03
West
North
1.52
South
1.23
2.65
East including
North-East
In Phase II, the transfer to retailers would be based on their

stocks of fertilisers. Here, several issues come up. One, it will
be very difficult to create a foolproof mechanism for verifying
the existing stock with retailers. Though stocks data have to be
recorded and information has to be added to a central database, it is not yet clear what safeguards against mis-invoicing
(including from collusion among agents) have been built into
the system.
Since the retailers will get cash transfers only after the validation of stocks, they need to be creditworthy in the eyes of
wholesalers. Any delay in the process will worsen their
situation and under liquidity constraints can affect their
operations. This can either push a retailer out of the market
(thereby reducing competition), or can create incentives for
misappropriation.
Also, without beneficiaries identified on the end-user side,
and large stocks at the retailer level, the risk of diversion for
industrial uses or smuggling out could be substantial, particularly in the border states. This is an important consideration
because the basis for transfer of funds in Phase II is not sales
(verified) but stocks.
Ultimately, how the access of farmers is affected would
depend on the level of competition among retailers. Steps must
be taken to promote the entry of new retailers and to avoid
cartels at the retailer level. This is especially pertinent since
the retail market is likely to get segmented based on credit
ratings. Retailers will be pre-qualified and without end-users
properly identified, there could be local monopolies.2 Unless
58
care is taken, competition among retailers may come down

once Phase II of a DCT scheme begins.
2.2 Mechanism for Delivery of Cash in Time
A well-functioning DCT with minimal transaction costs is at

the core of any cash transfer system, including one for fertilisers. DCTs have been used globally to raise the income of beneficiaries so that their access to basic products and services are
improved. There are different categories of cash transfer
schemes based on targeting, conditionality, and transfer frequency (TERI 2012). Conditional cash transfers (CCTs), unlike
unconditional cash transfers, provide cash by mandating the
fulfilment of certain conditions by the beneficiaries. Cash
transfers can also be targeted or universal. In the former,
truthful identification of the beneficiaries is critical. Frequency
of transfers forms another basis for judging cash transfer
programmes.
Globally, there are several examples of cash transfer
schemes, though to the best of our knowledge, none for fertilisers. In Asia, Bangladesh implemented the Female Stipend
Programme in 1982 and Food for Education Programme in
1993. The Bolsa Familia of Brazil (from 2003) and PROGRESA
(now Oportunidades) cash transfer programme of Mexico
(from 1997) are credited as success stories.
The Bolsa Familia programme aims to provide a minimum
level of income to the extremely poor and break the intergenerational transmission of poverty. Several institutions such
as the Ministry of Social Development, state governments,
municipalities, control agents and the Caixa Economica Federal (federal savings/credit union organisation) participate at
various stages. These institutions coordinate overall management, targeting and registration, payments, conditionalities,
and monitoring and evaluation. The payment is made taking
advantage of Brazils extensive and well-developed banking
infrastructure (Lindert et al 2007).
PROGRESA aimed to improve the health and nutritional
status of the poor, enable children to complete education, and
Figure 5: Per cent of Households Availing Banking Services
in Rural and Urban India (2012)
Households in urban areas

not availing banking
services 32.20%
Households in rural
areas not availing
banking services
45.60%
Households in
rural areas availing
banking services
54.40%
Households in
urban areas availing
banking services
67.8%
Table 6: Number of Branches of Scheduled Commercial Banks (2012)

Bank Group
Public sector banks

Private sector banks
Foreign banks
Regional rural banks
Total
Rural
22,812
1,701
8
12,451
36,972
Semi-Urban
Urban
Metropolitan
18,422
4,974
9
3,190
26,595
14,454
3,665
63
865
19,047
13,502
3,755
248
158
17,663
Total
69,190
14,095
328
16,664
1,00,277
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redistribute income to families in extreme poverty. The programme was built on previously existing infrastructure with
health, educational and administrative capacity and personnel already in place. Women were put at the centre by paying
cash directly (Levy 2006). The proposed DCT in fertiliser will
involve much greater flow of funds and is likely to require the
cooperation of several ministries, and various central and
state departments. The comparatively successful cases of cash
transfer schemes in other countries testify to the importance
of interdepartmental and inter-agency coordination, which in
Indias government programmes has usually been a weak link.
Further, a seamless transfer system requires well-functioning
banks. Banking services in India still cover only a small fraction
of the population (Figure 5, p 58). The total number of bank
branches in India is 1,00,277 (Table 6, p 58) and only 36,972
among them are rural. Facilities like automated teller machines
(ATMs) are lacking in rural areas (Figure 6). Above all, illiterate farmers find it difficult to understand the snags in the system and might not be able to avail themselves of redressal
services if transfers are not made accurately or on time.
For the proposed DCT for fertilisers to work efficiently,
significant investments in the banking sector might be needed.
The investments relate to increasing the rural coverage of
banks, reducing the complexity in banking procedures, and
improving the grievance redressal system of rural branches.
These requirements may not be met immediately since amenities like electricity are still non-existent in many villages.
To a large extent, timeliness and seamlessness in cash transfer is a technological issue, but other factors do matter. Farmers
have to depend on the banking correspondent (BC) for opening
their accounts and payments under the DCT. If the economic
incentives for BCs are not properly aligned to complete the formalities in time, it can reduce the effectiveness of the DCT.
Figure 6: Spread of ATMs in India (2012)
Rural
9.15%
Metropolitan
34.59%
Semi-urban
23.75%
Urban
32.51%
The roadblocks in a DCT were evident in a pilot scheme for

kerosene in Alwar, which was implemented in the Kotkasim
block in December 2011. Kerosene, which cost Rs 44.5/litre in
the market, was sold at a subsidised rate of Rs 15.25/litre
through ration shops. The major features of the pilot schemer
were all cardholders, except those who use gas cylinders,
would get three litres of kerosene; it has to be bought from
ration shops at the market rate to be eligible for the subsidy;
and the subsidy would be credited to the bank accounts
of the cardholders in advance, initially for three months.
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December 28, 2013
Table 7: Superior Kerosene (SKO) Allotted, Sold and Saved during the Pilot
Scheme in Alwar
Month
December 11
January 12
February 12
March 12
April 12
May 12
June 12
Total
SKO Allotted
SKO Sold
(000 Litres) (000 Litres)
84
84
78
78
78
78
78
558
18
23
13
12
12
9.5
4.5
92
Per Cent
SKO Sold
SKO Saved
(000 Litres)
21.43
27.38
16.67
15.38
15.38
12.18
5.77
16.49
66
61
65
66
66
68.5
73.5
466
Per Cent Number of

SKO Saved Accounts
78.57
72.62
83.33
84.62
84.62
87.82
94.23
83.51
6,000
13,700
15,020
14,458
15,020
15,020
15,020
Source: Khandelwal (2013).
It is often said fertiliser delayed is fertiliser denied. Fertilisers are a time-sensitive product. For example, rabi crops would
require access to fertilisers by October-November every year.
In Phase II or Phase III, if the cash transfer misses this deadline
(more so in Phase III since in Phase II retailers could operate on
credit if they have a good credit rating), the system would significantly lose its utility. Time sensitivity also implies that bargaining power could shift away from farmers.
Grievance cells should be particularly attuned towards addressing the issue of time delays. Specifically, the movement of
recorded grievances from the field level to the decision-maker
and that of the final decision back to the complainant should
occur without any lag. Transparency of the system is also
necessary in making beneficiaries aware of their rights.
In Phase II, with retailers stocking up fertilisers (most likely
with an expanded capacity), their working capital requirements will increase significantly. Before the system matures,
adequate arrangements need to be made to ensure that lack of
working capital at the retailer level does not hold it up.
2.3 Indexation Based on Market Price
Thereafter, the subsidy would be paid after the kerosene

was bought.
Officially, the pilot scheme was termed a success with a decline in the consumption of kerosene (by as much as 75%) being
attributed to reduced diversion. In reality, during the seven
months of implementation, only 16.5% of the allotted kerosene
was sold, mainly due to a collapse in demand from poor households who did not get the promised cash even after one year
(Table 7).
vol xlviii no 52
The working of a DCT is contingent on how well it preserves

the purchasing power of farmers for buying fertilisers. If fertiliser prices are decontrolled, there would be a greater synchronisation with world prices. These prices, especially for fertilisers
such as urea, could be higher and more volatile. Figure 7 (p 60)
illustrates the effect of decontrol, showing the upward price
trajectories of calcium ammonium nitrate and ammonium sulphate during 1980, 1991, and 1994 when low analysis nitrogen
fertilisers (with nitrogen less than 30%) were decontrolled.
Similar patterns hold for diammonium phosphate (DAP), single
super phosphate and muriate of potash (MOP). Phosphatic and
potassic fertilisers were decontrolled in 1992.
Figure 8 (p 60) presents the behaviour of international fertiliser
prices over time in constant 2005 US dollars. Post-2000 (when
59
time. Alternatively, levels of cash transfer could be set a priori

for different price ranges. This would require monitoring to
prevent gold plating where agents could collude and artificially raise prices.
Figure 7: Maximum Retail Prices of Fertilisers in Terms of Nutrients

in India (Rs/kg)
60
50
Ammonium sulphate
40
2.4 Supply-Demand Parity, Preservation of Right

Incentives in Production and Distribution
Calcium Ammonium
Nitrate
30
Single Super
Phosphate
20
Diammonium Phosphate
10
Urea
Muriate of Potash
0
1972 1975 1978 1981 1984 1987 1990
1993
1996
1999
2002
2005
2008
agricultural prices hit a bottom), fertiliser prices have been rising and have been more volatile. There have also been significant spikes, especially during the 2008 food-fuel price crisis.
Between 2007 and 2008, prices per tonne of all three major
fertilisers urea, DAP and MOP increased manifold. The price
of urea increased from $309 in 2007 to $493 in 2008 (a peak of
$770 in August 2008) while that of DAP increased from $433 to
$967 (a peak of $1,200 in April-May 2008). The MOP price,
which was about $200 in 2007, increased to $630 in 2009 and
reached a level of about $875 in February-March 2008 (FAI
2012, quoted in Sharma 2012).3
How the altered subsidy disbursement system affects fertiliser pricing will constitute a critical element in the indexation
requirements under DCT to preserve purchasing power.4 Since
it is difficult to predict volatility, indexation would require
official adjustments in amounts to be transferred from time to
If cash transfers in Phase III reach farmers in time and are

properly indexed, there is likely to be a significant effect on
fertiliser demand. The local supply conditions need to support
this change. Though a DCT does not mandate spending on fertilisers, several farmers not buying fertilisers now could begin
doing so, resulting in an increase in fertiliser demand. Without
a demand-supply match overall, or locally, it could create fertiliser price spikes.
Strategies such as maintaining adequate stocks at the selling
point and timely delivery should be followed at the outset to
avoid this outcome. The feasibility of implementing this strategy on a long-term basis is, however, questionable. When the
cash transfer system is implemented throughout India, the
supply of fertilisers will be price inelastic in the short run. The
constant production capacity and the difficulties in scaling up
imports to meet immediate demands will add to the problems.
Importantly, this is a possibility even when prices are administered if there is an inherent demand-supply gap (Figure 9,
p 61). Over the last three decades (1980-2010), the overall
demand and supply of fertilisers has been in balance, but the
story is different if we look at individual fertilisers. In both
nitrogenous as well as phosphatic fertilisers, there existed deficits that had to be bridged with imports. All requirements for
potassic fertilisers are met by imports.
All factors such as poor transportation facilities that reduce
the number of sale points can enhance the monopoly power of
Deflated
Figure 8: International Prices of Fertilisers (in constant 2005
$/mt)International Price of Fertilizers (US$/mt)
1,200
1,000
800
600
400
TSP
DAP
200
MOP
Urea
0
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 1008 2010
60
December 28, 2013
vol xlviii no 52
EPW
existing dealers at the local level, creating a local demandsupply imbalance. The incentives to artificially create excess
demand could exist at different points in the supply chain.
Since a tracking system for the entire supply chain will be
operational by Phase I, it should be possible to spot such artificial scarcities. If dispatches are barcoded or radio frequency
identification (RFID) coded, they could be more adequately
monitored and maintained.
Demand
supply of
balance
of total (values
fertilisers
Figure 9: Demand-Supply
Balance
Fertilisers
in 000 tonnes)
45,000
40,000
Total Production
35,000
30,000
25,000
Total Consumption
20,000
15,000
10,000
Total Import
5,000
Surplus or Deficit
0
1980
1983
1986
1989 1992 1995
1998
2001 2004 2007
2010
RFID can be tagged to each bag of fertiliser sold to track its

movement from the factory to the field. The technique, proposed by the Indian Farmers Fertiliser Cooperative (IFFCO),
will be able to track about six crore tonnes of fertilisers dispatched in approximately 120 crore bags of 50 kg each. RFID
tags could be embedded with a unique code specifying details
such as the manufacturers name, date of production, nutrient
content of the fertiliser, and the subsidy payable.
3 Looking Forward
In this section, we revisit the potential problems in a DCT

scheme for fertilisers and make some suggestions for addressing them. We recommend, inter alia, that elements of conditionality be introduced in different ways to maximise the
benefit of a DCT. Interlinked arrangements would also improve
the outcomes of a DCT. Further, we suggest that the transfer
system should involve demand-side interventions aimed at
rationalising the usage of fertilisers in total and across nutrients. We briefly discuss the guiding principles for a modified
DCT below.
(i) Identification of Beneficiaries; Conditionality of Purchases: A well-functioning DCT for fertilisers has to link payments to purchases. This by itself will not remove the problem
of misidentification. It, however, will likely lessen the extent of
errors since those who are not farmers would face a cost of
disposal or sales for their purchased fertilisers. Though in
principle an unconditional transfer (without link to fertiliser
purchases) would give farmers more options to allocate their
funds based on their preferences, the potential of errors and
omissions is higher in it. Linking to purchases, the indexation
rules should be specified ex ante to preserve purchasing
power. In Phase II or III, fertilisers need not be sold to the
targeted farmers to trigger a transfer. This can accentuate the
problem of leakages.
EPW
December 28, 2013
vol xlviii no 52
(ii) Conditionality Related to Optimal Mix of Fertilisers

and Level of Usage: The price differential among nutrients
leads to an imbalance in the use of fertilisers. The nutrientbased subsidy (NBS) has tried to rectify this, but exclusion of
urea from NBS limits its scope. When the prices of the phosphatic and potassic fertilisers registered a sharp increase after
a partial decontrol in 1992, it skewed the NPK ratio from
5.9:2.4:1 (the normally accepted ratio being 4:2:1) in 1991-92 to
9.7:2.9:1 in 1993-94. A somewhat similar thing happened in
2011-12 after another partial decontrol of fertiliser prices the
NPK ratio deteriorated as consumption of urea increased while
that of DAP and potash declined (Sharma 2012).5 The imbalance in nutrients is a critical issue and a DCT should try to
improve on the current situation.
Towards this, a DCT could be modified into a conditional cash
transfer for fertilisers (CCTF), basing it on use of an optimal mix
of fertilisers (N, P, K, and micronutrients such as boron and
zinc). As part of the design, the unit of sale at the retailer level
could be optimal fertiliser mixes in packs adequate for 0.5 hectares of land (could vary based on agronomic conditions and
cropping patterns). This will be sufficient fertiliser for the landholdings of more than 85% of the farmers in the country.
This system can be institutionalised gradually in Phase II. In
Phase III, retailers can be guided to sell fertilisers in these bags
with adequate mixes along the lines of starter packs in Malawi.
The Starter Pack Programme was started in 1998-99 and distributed three million packs, each containing maize seed, legume
seed, and fertiliser for use in 0.1 hectare of land. Vouchers for
buying fertilisers were also distributed to 5,00,000 small holders.
In the programme targeting poor small holders, each household received two fertiliser coupons for one bag of 50 kg of basal
dose and one bag of 50 kg of urea, and a maize seed coupon.6
(iii) Complementary Interventions: In the proposed DCT,
some complementary interventions, particularly on the demand side, can improve outcomes. The government should institute credible certification mechanisms to label restrained
use of fertilisers and create consumer awareness on residue
limits related to chemicals. This would constitute a demand
pull for regulating the use of fertilisers.
In some areas in the country, organic farming has started
giving significant returns. This aspect of long-term soil health
needs to be incorporated in the design of a DCT. In areas and
crops where organic matter (such as vermi-compost) is a good
substitute for chemical fertilisers, pricing should take into
account the opportunity cost of organic farming. The system
could make entitlements transferable across chemical fertilisers and organic manure. In this regard, along the lines of certification for residue limits related to chemicals, a credible system of organic certification should also be created. Backed
with consumer awareness that would likely result in a price
premium for organic produce, this will create an opportunity
cost for farmers for using chemical fertilisers.
In addition to its impact on soil quality, the most severe consequence of fertiliser use is on highly stressed water resources.
Fertilisers increase water consumption, but are also a source
61
of water pollution. Heavy metals, cadmium, chromium, copper, lead, and zinc are the highest in super phosphate fertilisers (Deb and Joshi 1994). The NPK fertilisers have heavy metal
contents lower than super phosphates, but higher than ammonium nitrate. Water-conserving technologies and farming
methods should be integrated into a comprehensive agricultural subsidy system, including in a DCT for fertilisers.
A generic cash transfer system is not designed to address all
these issues. A modified transfer scheme that is a mixture of
Phase II and Phase III could be piloted with these other objectives
built in. The alternative is to give farmers coupons and to
transfer cash to retailers for each bag of fertiliser sold. This bag
of fertiliser could be made to have an optimal mix of fertilisers
adequate for a given size of land (for example, half a hectare).
A scheme like the RFID-enabled mechanism proposed by
IFFCO could be used to optimise fertiliser usage. In effect, this
would translate to an electronic coupon that can only be used
to buy fertilisers (Kapur 2011). Since Phase I would have the
complete mapping of the supply chain, at the level of packing
and RFID coding, optimal mixes for a designated land size
could be prepared.
To the extent that money would move directly from retailers
to the bank accounts of farmers, some bargaining problem
issues could be addressed. Farmers, particularly the small ones
who are at the mercy of BCs for cash flow, could be shielded if
money moves directly on sales to the account of the farmer.
(iv) Interlinkages with Other Input Markets: Fertiliser is
one of several inputs in production. As demand and supply of
fertiliser would get affected by a DCT, it will bear on related

markets such as seeds. Timely access to quality seeds has been
a significant constraint for farmers. Both the requirement and
availability of seeds have risen over time. Between 2004 and
2011, seed requirements increased from 110.83 lakh quintals to
330.41 lakh quintals. The seed availability in the same period
increased from 132.27 lakh quintals to 353.62 lakh quintals
(GOI 2013). In quantity terms, seed availability is generally
more than the requirement. The problem is possibly one of access, particularly for small and marginal farmers.
Given the economies of scope, like in Malawis starter packs,
there could be a benefit in combining seeds with fertilisers in
the input basket reaching farmers, which can address this
problem. Any programme which delivers a mix of inputs,
rather than fertiliser alone, will have an edge. Yet, like in the
case of Malawi, care should be taken that the system does not
undermine the private systems of input delivery. Further, the
packs should be of good quality, and should be delivered in
time with proper advice on usage.
(v) System of Soil Health Cards: Recent farmer surveys in
Andhra Pradesh, Madhya Pradesh, Tamil Nadu and Uttar
Pradesh show that less than 5% of farmers ever had their soil
tested for nutrients. Most farmers use heuristic rules to decide
on quantities of nutrients to apply. In recent years, central and
state governments have intensified efforts for soil testing and
communicating the test results to farmers. Nearly 41 million
soil health cards (SHC) had been issued until 2010-11. More
than 1,000 soil testing laboratories have been built across
Decentralisation and Local Governments

Edited by
T R RAGHUNANDAN
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movement. With strong advocates for it, like Gandhi, it resulted in constitutional changes and policy decisions in the
decades following Independence, to make governance more accountable to and accessible for the common man.
The introduction discusses the milestones in the evolution of local governments post-Independence, while providing an
overview of the panchayat system, its evolution and its powers under the British, and the stand of various leaders of the
Indian national movement on decentralisation.
This volume discusses the constitutional amendments that gave autonomy to institutions of local governance, both rural
and urban, along with the various facets of establishing and strengthening these local self-governments.
Authors:
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Mani Shankar Aiyar Benjamin Powis Amitabh Behar, Yamini Aiyar Pranab Bardhan, Dilip Mookherjee Amitabh Behar Ahalya S Bhat, Suman
Kolhar, Aarathi Chellappa, H Anand Raghabendra Chattopadhyay, Esther Duflo Nirmala Buch Ramesh Ramanathan M A Oommen Indira
Rajaraman, Darshy Sinha Stphanie Tawa Lama-Rewal M Govinda Rao, U A Vasanth Rao Mary E John Pratap Ranjan Jena, Manish Gupta
Pranab Bardhan, Sandip Mitra, Dilip Mookherjee, Abhirup Sarkar M A Oommen J Devika, Binitha V Thampi
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62
December 28, 2013
vol xlviii no 52
EPW
India with an annual testing capacity of 10.7 million samples.

More such investments are needed to further spread the soil
testing practices and utilisation of results of tests.
No empirical evidence exists on whether or not soil testing
leads to a more balanced use of fertilisers. If the incentives are
distorted, farmers will likely continue imbalanced use in spite
of knowing soil test results. Mainstreaming the use of soil
health cards in a DCT for fertilisers can be an important step in
optimising the usage of fertilisers and also correcting imbalances. The sale points could become a node for extension for
matching soil needs with the levels and types of fertilisers
used. A farmer intercropping cereals with pulses, for example,
might need less of nitrogen fertilisers, and that should be
reflected in his soil health card.
4 Conclusions
In this paper we conduct an ex ante assessment of the proposed system of DCT for fertilisers. A DCT for fertilisers faces
the extremely difficult problem of how to identify beneficiaries. Most of the criteria that can be thought of for identification (such as BPL cards, farmer cards with landholding, cropping patterns) are fraught with problems. Apart from misreporting, the changes over time in these characteristics are
likely to make targeting very difficult.
Further, the cash transfer for fertilisers has a direct interface

with the market and incentives for adequate and timely supply
at different levels of the supply chain need to be preserved.
There can be hold-ups as markets at the wholesale or retail
level become consolidated and the demand for fertilisers rises.
As the DCT system is expected to replace (or at least phase
out) the current system of subsidies, the evolution of market
prices will have a significant bearing on its effectiveness.
Indexation to prices could turn out to be extremely difficult,
given the volatility in fertiliser prices. Without indexation, the
purchasing power of farmers could be eroded. Yet the costs of
having a system that has perfect indexation could be quite
high, especially because there are several different fertilisers.
The DCT system for fertilisers intends to improve the access
of farmers. Still, it should take into account the issues of the
optimal use of fertilisers, the right mix of fertilisers, and also
organic farming. An overhaul of the subsidy system should be
used as an opportunity to rationalise the usage of fertilisers,
and should create demand pull pressures to regulate fertiliser
usage. The productivity of fertilisers has declined significantly
over time and could worsen if unregulated levels and mixes of
fertilisers continue to be applied. We propose some modifications in the proposed design of a DCT, which can potentially
improve outcomes.
Notes
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December 28, 2013
vol xlviii no 52
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63

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