Price Elasticity of Fertilizer Demand in India: A Review

The government of India has tried to assure a reasonable return to fertilizer industry so that indigenous production can keep pace with the projected increase in demand of fertilizers. At the same time the farmers have also been assured of a reasonable price so that fertilizer use can be encouraged. The Government efforts to meet the twin policy objectives have resulted in a substantial increase in domestic production as well as consumption of fertilizer but at the same time they have also resulted in an increase in subsidy on fertilizers from Rs.604 crores in 1979-80 to Rs.4388 crores in 1990-91. In the context of reducing budgetary deficit, this increasing level of subsidy on fertilizers has been a matter of concern. In 1991-92 budget, a proposal was made to increase the price of fertilizer by 40 per cent, and this was subsequently reduced to 30 per cent, except in the case of small and marginal farmers where no increase has been envisaged. The impact on the over all cost of cultivation ranging between 0.1 per cent in case of paddy in Assam to highest of 5.25 in case of Wheat in West Bengal, depending on the cropping pattern and level of use of fertilizers. The concern now is (i) whether the price increase will reduce the absolute level of consumption of fertilizers and / or, (ii) whether it will cut down the rate of growth of fertilizer consumption, which is necessary for achieving the food and fiber production? This paper is designed to review various estimates of fertilizer price elasticities and their suitability for assessing the impact of price rise of fertilizers on their consumption. Before various estimates are reviewed, the fertilizers use scenario in India is briefly reviewed to provide the backdrop for examining the suitability and acceptability of the estimates of fertilizer price elasticity. At the end of the paper, the areas for further research have been delineated.