Reforming the Fertiliser Subsidy in India

Source:   IE

Subject:  Economics

Context: Amid wide-ranging economic reforms led by present government, economists have called for urgent restructuring of India’s fertiliser subsidy regime.

About Reforming the Fertiliser Subsidy in India:

What it is?

• The fertiliser subsidy is a government support mechanism that keeps fertiliser prices—especially urea—artificially low for farmers by compensating manufacturers for the gap between cost of production/import and retail price.
• It aims to ensure affordable inputs and food security but has evolved into one of India’s largest and most distortionary subsidies.

India’s current status and trends:

• Second-largest subsidy in the Union Budget, next only to food subsidy.
• Expected to reach ~₹2 lakh crore in FY26, exceeding the budget of the Ministry of Agriculture & Farmers’ Welfare.
• Urea dominates the subsidy: nearly two-thirds of total outgo, sold at a fixed price of ₹242 per 45-kg bag, among the cheapest globally.
• High import dependence: ~78% natural gas (urea), ~90% phosphatic fertilisers, and nearly 100% potash.
• Resultant nutrient imbalance: India’s N:P:K ratio has worsened to 10.9:4.4:1, far from the recommended 4:2:1.

Why subsidy is needed in India?

1. Food security imperative: Fertiliser subsidy enabled widespread adoption of modern inputs during the Green Revolution, sharply raising cereal output and avoiding mass hunger.
   E.g.  In the 1970s, the fertiliser–grain response ratio was around 1:10, underpinning India’s food self-sufficiency.
2. Protection of small and marginal farmers: With over 85% farmers cultivating small holdings, subsidies cushion them against volatile global fertiliser and energy prices.
   E.g.  Sudden deregulation would spike input costs and reduce fertiliser use, especially among cash-constrained farmers.
3. Ensuring affordability of cultivation: Fertiliser subsidy lowers the cost of cultivation and stabilises farm profitability in rain-fed and low-productivity regions.

E.g.  Cheap urea keeps per-acre input costs manageable for cereal farmers.

1. Price stability and inflation control: Input subsidies indirectly moderate food prices by containing cost-push inflation in agriculture.

E.g.  Low fertiliser prices help stabilise cereal prices in the short run.

1. Risk mitigation in a climate-vulnerable sector: Agriculture faces monsoon variability and yield uncertainty; subsidies act as a buffer against income shocks.

E.g.  Subsidised inputs reduce downside risk during poor rainfall years.

Challenges associated with the current regime:

1. Low nutrient use efficiency (NUE): Only 35–40% of nitrogen applied is absorbed by crops, reflecting inefficient and excessive urea use.

E.g.  The rest volatilises or leaches, raising costs without proportional yield gains.

1. Environmental degradation: Excess nitrogen pollutes groundwater and depletes soil organic carbon, harming long-term soil fertility.

E.g.  Nitrate contamination has made groundwater non-potable in several agrarian belts.

1. Productivity stagnation: Rising fertiliser consumption has not translated into commensurate yield growth.

E.g.  Fertiliser–grain response ratio declined to ~1:2.7 by 2015 in irrigated areas.

1. Leakages and diversion: Price-controlled urea incentivises diversion to non-farm uses and cross-border smuggling.

E.g.  20–25% of subsidised urea reportedly leaks into plywood, glass industries or illegal trade.

1. Fiscal and geopolitical vulnerability: Heavy import dependence exposes subsidy outgo to global energy and commodity shocks.

E.g.  A spike in natural gas prices immediately inflates the subsidy bill.

Way ahead:

1. Gradual price decontrol with income support: Shift from price subsidy to direct income transfers, protecting farmers while restoring market signals.

E.g.  Redirect savings through PM-KISAN–type support while allowing fertiliser prices to reflect nutrients.

1. Bring urea under Nutrient-Based Subsidy (NBS): Align urea pricing with phosphorus and potassium to correct nutrient imbalance.

E.g.  Reduce nitrogen subsidy and rebalance support towards P and K without increasing total outlay.

1. Leverage digital agriculture (Agri Stack): Use land records, PM-KISAN data, crop maps, and satellite imagery for precise targeting.

E.g.  Cap fertiliser quantity based on land size and crop sown to curb overuse.

1. Promote balanced and precision farming: Encourage complex fertilisers, micronutrients, fertigation, and customised blends to raise NUE.

E.g.  China uses ~60% complex fertilisers compared to ~17% in India.

1. E-vouchers and PoS-based delivery: Digitise fertiliser distribution to eliminate diversion and improve accountability.

E.g.  e-RUPI–style vouchers redeemable only at authorised agri-input dealers.

Conclusion:

Reforming fertiliser subsidy is not about withdrawing support but making it smarter, greener, and fairer. Correcting price signals can save ~₹40,000 crore annually, improve soil health, and raise farm productivity. With high growth and manageable inflation, this is the right moment to align farm subsidies with sustainability and income security.