Behavior of Private Retailers in a Regulated Input Market: An Empirical Analysis of the Fertilizer Subsidy Policy in Nepal

The private sector in Nepal participates in the regulated import and distribution of three types of subsidized fertilizer. However, almost 55% of the agrovets (family-owned microenterprises) that retail agricultural inputs do not comply. Many farmers rely on the fertilizer purchased through these agrovets, including subsidized ones. There is no private sector importer of the three types of fertilizer covered by the subsidy program, which indicates that the agrovets either acquire these through leakage in the government distribution system or through illegal cross-border trade from India, both of which are considered legal noncompliance. We discern the determinants for this noncompliant behavior of agrovets using logistic regression. The results from logistic regression suggest that the agrovets that are more likely to comply are registered, have membership in business associations, and have a higher number of competitors. Those with diversified business portfolios and covering a greater number of districts are less likely to comply. Key informants, consisting of both public and private sector stakeholders, were solicited for their views on solving this noncompliant behavior. The private sector unanimously asserts the need for deregulation of fertilizer imports and the participation of agrovets in the distribution of the subsidized fertilizer. In contrast, the public sector is skeptical of the ability and trustworthiness of the private sector in the import and distribution of quality fertilizer. We propose a middle ground to mitigate private sector noncompliance and suggest a policy revisit to increase the fertilizer supply and distribution efficiency.