Opinion For government’s reform drive to succeed, rationalise agri subsidies
If both food and fertiliser subsidies can be merged with the augmented PM Kisan scheme, the Modi government is really in “Reform Express” mode
If both food and fertiliser subsidies can be merged with the augmented PM Kisan scheme, the Modi government is really in “Reform Express” mode. Prime Minister Narendra Modi has said that his government is in “Reform Express” mode. It has carried out reforms in income tax, GST, and the job guarantee scheme, and concluded free trade agreements (FTAs). These are commendable moves. US President Donald Trump’s tariff shock has stirred the Modi government into implementing long-overdue reform. The results have been better than expected. The first advance estimates project the Indian economy to grow at 7.4 per cent in 2025-26 (FY26). Consumer inflation is also down to 1.3 per cent in December 2025. But will this performance repeat in FY27, as the trade deal with the USA remains uncertain? The answer is not clear, but a lot will depend on how many more reforms the Modi government can undertake. Here are a few areas in the agri-food space that have been crying out for intervention for a long time.
Let us begin by noting that the agri-GDP growth is likely to be only 3.1 per cent in FY26, a substantial drop from 4.6 per cent in the previous year, FY25. The lesser-known fact is that the primary reason for the low consumer price inflation is the virtual collapse in some food prices. Onion prices are down by 48 per cent in December compared to last year’s level, potato prices are down by 35 per cent, and all major pulses are selling at 10 to 30 per cent below their MSPs. Where is the emergency support for farmers from the government? In such a depressed price scenario, it is not feasible for the government to achieve its objective of atmanirbharta (self-sufficiency) in pulses, even with its Mission on Pulses and Oilseeds. We need crop-neutral incentive structures — they are currently heavily skewed in favour of water and fertiliser-intensive crops like rice, sugarcane, and wheat. This is a fallout of the massive subsidies doled out by states and the Centre — in particular, free or highly subsidised power and fertilisers, especially urea. This gets compounded by the open-ended procurement of these crops, in some states at least.
If the Modi government is really in “Reform Express” mode, it needs to focus urgently on at least two items in the Union budget. The food subsidy is likely to touch Rs 2.25 trillion and the fertiliser subsidy may go up to Rs 2 trillion, in a total budget of around Rs 51 trillion. Together, these are about 8 to 8.5 per cent of the budget. Both are operating at a sub-optimal level. Let me explain.
The food subsidy is the difference between the economic cost of procuring, stocking and distributing rice and wheat by the Food Corporation of India (FCI) and the amount it generates from the beneficiaries of the public distribution system (PDS). In the case of rice, the economic cost hovers around Rs 42/kg, and for wheat, it’s around Rs 30/kg to FCI. It gives 5 kg of free rice or wheat to about 813 million people under the PM Garib Kalyan Yojana. Roughly 56 per cent of the country’s population of around 1.5 billion is covered. The introduction of point of sale (POS) machines in more than 5 lakh fair price shops (FPS) was a significant reform of the Modi government. It helped to reduce massive leakages in PDS. But how rational is giving free food to 56 per cent of the population, when, according to the World Bank’s extreme poverty criteria — $3 per capita/day/in purchasing power parity (PPP) terms at 2021 prices — India’s poverty came down to just 5.3 per cent of the population in 2022? Even at a higher poverty line of $4.2/per capita/day, poverty in India was about 24 per cent. One can argue that the extremely poor need to be given free food (antyodaya). Viewed from this perspective, only about 5 per cent of the country’s population needs free food, while others should pay at least half of the MSP. If not, then this policy is nothing but the biggest political revdi (dole) the government is giving consumers for votes. It gives free rice even to rice growers. This is irrational as these rice growers first give all their paddy to the government and get back free rice with enhanced economic cost and subsidy.
How can one reform this system? Scale down the coverage gradually from the current level of about 56 per cent of the population to 40 per cent, then to 25 per cent, and finally to about 15 per cent. If it does not have the political courage to do so, the government should at least embark on direct cash transfers to rice and wheat producers. Further, convert at least 20 per cent of FPS into nutrition hubs, which have pulses, oilseeds, milk, eggs, fruits and vegetables, which are more nutritious than just wheat and rice. Beneficiaries can be given coupons to buy more diversified food.
Now, let us turn to the fertiliser subsidy. It is the second largest subsidy (about Rs 2 trillion) in the Union budget, and bigger than the entire budget of the Ministry of Agriculture and Farmers’ Welfare (MoAFW) (Rs 1.37 trillion). The excessive subsidy for urea amounts to subsidising toxins. Urea is not being used in a balanced manner — the excessive use of phosphatic (P) and potassic (K) fertilisers is contaminating groundwater and increasing greenhouse gas (GHG) emissions. A sizeable part (20 to 25 per cent) also leaks away. The solution is direct cash transfers to farmers and decontrolling fertiliser pricing. If the government can’t do that immediately, it can at least bring urea under the nutrient-based subsidy (NBS) and give the same subsidy as on DAP and MOP. Also, shift the fertiliser subsidy from the Department of Fertilisers to MoAFW, which deals with farmers directly.
If both food and fertiliser subsidies can be merged with the augmented PM Kisan scheme, the Modi government is really in “Reform Express” mode.
Gulati is distinguished professor at ICRIER. Views are personal
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