So the [Indian] government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.
The subsidies were designed to make up the difference between the production price and sale price—and to give the producers a 12% after-tax return on any equity investment.
…
In 1991, with the cost of the subsidy weighing heavily on India’s finances, Manmohan Singh, then finance minister and now prime minister, pushed to eliminate it. Most fertilizer companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.
“The business interests lobbied and the business interests prevailed,” says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilizers except for urea.
“That’s when the imbalanced use of fertilizers began,” says Pratap Narayan, ex-director general of the industry group, the Fertilizer Association of India.
With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.
In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to- ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show.
“This type of ratio is a disaster,” Mr. Gulati says. “It is keeping India from reaching the production levels that the hybrid seeds have the power to yield.”
Green Revolution in India Wilts as Subsidies Backfire
Is this a failing of farmers or of government? This reminds me of the banana problem posed by Cowen:
Let’s say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed. Is that government failure or market failure? The price was distorted, but I still say this is mostly market failure. No one made you put so many bananas on your roof.
Read fertilizer for bananas and there you go. Government left the gun lying around but they shot it.
