New system to check fertilizer smuggling, pilferage

The system is likely to help save the government at least Rs.5,000 crore a year by checking fake claims, pilferage

 According to a report at least 3-4 million tonnes of subsidized fertilizers are diverted to chemical industries every year in Gujarat and Tamil Nadu alone.

New Delhi: Two information management systems that separately track and regulate the supply of fertilizers across the country will be merged to create a fool-proof way to deliver subsidies to India’s 235 million farmers and help save the government at least Rs.5,000 crore a year by checking fake claims, pilferage and smuggling.

The integration, to be completed in a few weeks, will help monitor fertilizer shipments right from the factory or sea port to the retailer on a real-time basis for the first time, said an official in the fertilizer department on condition of anonymity. The system will also allow government officials to immediately detect an irregular sale or disbursal of subsidy.

The new system will address a problem that India has grappled with little success for a long time. Cheaper subsidized fertilizers are routinely diverted to other industries and smuggled to neighbouring countries such as Bangladesh and Nepal. Urea, for example, is diverted to industries such as plywood, dye, adhesives and even to produce adulterated milk, while potash finds its way to firecracker factories. At least 3-4 million tonnes of subsidized fertilizers are diverted to chemical industries every year in Gujarat and Tamil Nadu alone, according to a 2012 report in Tehelka magazine, citing an unnamed fertilizer department official.

“I think this system would provide a better idea of actual flows of fertilizers and stocks lying at various points in the supply chain,” said Abhijit Sen, member, Planning Commission. “It will definitely put some check on smuggling to some extent.”

The fertilizer department had to release subsidies in the absence of a way to confirm if the claims were fake or the states were just lethargic in verifying that the fertilizers have indeed reached the districts, said the official. The fertilizer department estimates that it paid around Rs.2,500 crore as subsidies on unsubstantiated claims in the five years ended March 2012. On an average, 4% of the claims failed to get approval from the states during those five years— a mandatory requirement until 2012.

“Smuggling may not be more than 1-2% but even those minuscule percentages translate into huge losses in absolute terms, said Ajay Vir Jakhar, chairman of the Bhartiya Krishak Samaj, a non-political farmers association.

Currently, the two systems are managed by different organizations. The Fertilizer Monitoring System (FMS) is handled by Lateral Praxis which has a contract until February 2014. The second, the Mobile Fertilizer Management System (mFMS), has been designed and managed by the National Informatics Centre (NIC)—an entity under the ministry of communications and information technology.

The end-to-end tracking system was developed to provide subsidy straight to the farmer instead of channeling it through fertilizer manufacturers as part of the direct benefit transfer (DBT) programme.

The move to implement the merger comes despite finance minister P. Chidambaram saying in May that “the fertilizer subsidy will be among the last subsidies to be transferred (through DBT) because they are more complicated”.

Fertilizers are not always purchased by the person who owns the land and the quantity purchased can vary depending on factors such as monsoon, crop variety and soil quality, said another fertilizer department official.

“The biggest two challenges are—identifying the beneficiary and prefunding him,” said the first official.

Irrespective of whether the government doles out fertilizer subsidies through the DBT programme, the merger will lead to big savings, said the official.

“If only two states account for 30-40 lakh tonnes of pilferage, you can very well extrapolate the figures for the whole country,” said the official, without providing details.

By releasing a part of the subsidy when the final sale of the fertilizer is made to the farmer, the department expects to hold back payments of around Rs.40,000 crore by about 5-6 months, increasing liquidity and generating interest income.

Currently, around 90% of the subsidies is released to the manufacturer when the fertilizer reaches a district headquarters and the remaining 10% when a retailer acknowledges the receipt of fertilizer stock form the wholesaler on mFMS, the mobile system.

The department is also considering changing this ratio to 60:40, the official said. This means that around 40%, or Rs.40,000 crore, of subsidy will be released after 5-6 months, or whenever the sale is registered.

To be sure, so far linking of subsidies to the final sale has been carried out only in six districts—Madurai, Tamil Nadu; Nawanshahr, Punjab; Sonipat, Haryana; Ajmer, Rajasthan; Bilaspur, Chhattisgarh; and East Godavari, Andhra Pradesh.

Some experts are sceptical about the monetary benefits accruing to the department without the parallel implementation of DBT.

“Even if DBT were implemented today, the government wouldn’t be able to save much on subsidy in the absence of well-defined criteria,” said Jakhar. “Quantity of subsidy that a farmer gets should be inversely proportional to his land holding” can be one of the criteria to stop big farmers from reaping the benefits of subsidized fertilizer. The poverty line as a criterion is too fluid and vague, he said.

Still, with the launch of the second phase of mFMS on the Independence Day, the government took one more stride to strengthen the monitoring of sales of subsidized fertilizers. The initial phase of this programme was launched nine months earlier in November 2012 with the objective of getting acknowledgement from the retailer, the fertilizer official said.

The first step to track fertilizer movement was, however, started in January 2007 with the launch of FMS. The system tracks the movement of fertilizers from the factory to the district headquarters.

“It was a tremendous improvement over the earlier system where the department had to take the word of the company on faith,” said the department official.

The project took on the gargantuan task of checking receipts and tracking the movement of fertilizers across the country. “The sheer enormity of the task of cross-checking the receipts at every step of such a huge and spread-out supply-chain made it virtually impossible to verify the companies’ claims,” said an executive from Lateral Praxis. Since November 2010, all subsidy claims have been generated through FMS. He declined to be named.

With the implementation of the mFMS system, the government can now track the movement from district headquarters to the retailers, using mobile phones.

About 193,000 wholesalers and retailers are on the mFMS system.

“The education level of most private retailers and ground level (farm) societies is very low,” said A. Roy, marketing director of Indian Farmers Fertiliser Cooperative Ltd. “The wholesaler, or even the company, acknowledging the receipts of stocks on behalf of the retailer is a very common practice.”

The software is being upgraded to check such malpractices, Roy said.

Many wholesalers said that they are not well-versed with the system and nearly all the retailers contacted said they rarely ever acknowledged the text message they receive from the wholesaler.

“Hamari to seedha phone se baat ho jaati hai. jab tak chal raha hai, chal raha hai (I communicate directly over the phone with the wholesaler. I’m just continuing the old way as long as it works),” said a Chhattisgarh retailer. To tackle the apathy, companies—be it a public sector undertaking, a private company or cooperative—have started to train wholesalers and retailers.

The integration is certainly a step forward and if it leads to DBT implementation in fertilizers, the system will become even better, said Sudhir Panwar, a professor of Biotechechnology at University of Lucknow. “It has the potential to curb black-marketing if it’s able to break the nexus between the wholesalers and retailers who have created an artificial shortage.”