Opinion Reforming the fertiliser subsidy demands political courage, offers high rewards
The fertiliser subsidy is the second-largest item in the Union budget, next only to the food subsidy — its allocation is more than the Ministry of Agriculture and Farmers’ Welfare allocation of Rs 1.37 lakh crore in FY26.
Reforming the fertiliser subsidy regime demands political courage, but the rewards could be substantial. (Illustration: C R Sasikumar) Prime Minister Narendra Modi has initiated wide-ranging reforms. They involve income tax, GST, labour laws, insurance, and free trade agreements. Now, even the rural employment scheme is undergoing a churn. The idea is to sustain GDP growth above 7 per cent amid intensifying geopolitical risks, including US President Donald Trump’s tariff pressures. Yet, one crucial sector that has largely escaped reform is agriculture. Perhaps it is still constrained by the political aftershocks of the aborted farm laws. However, the exploding fertiliser subsidy, expected to touch Rs 2 lakh crore in a Union Budget of Rs 51 lakh crore in FY26, demands urgent attention. This is not a call to withdraw support, but to reorient it in a meaningful way.
The fertiliser subsidy is the second-largest item in the Union budget, next only to the food subsidy — its allocation is more than the Ministry of Agriculture and Farmers’ Welfare allocation of Rs 1.37 lakh crore in FY26. Its rapid increase reflects rising fertiliser consumption and escalating input costs, amplified by India’s heavy import dependence — around 78 per cent for natural gas that goes into urea production, nearly 90 per cent for phosphatic fertilisers (raw materials or finished products), and total reliance on imports for potash. Given the volatility in energy prices and commodity markets, this makes the subsidy fiscally precarious and geopolitically vulnerable.
Urea sits at the heart of this distortion. Nearly two-thirds of the fertiliser subsidy goes to urea, sold at a fixed price of Rs 242 per 45-kg bag — among the cheapest globally. In contrast, DAP and MOP prices have been decontrolled, and a fixed subsidy is given, linked to nutrient content rather than fixed retail prices under the Nutrient-Based Subsidy (NBS) regime since 2010. This sharp price asymmetry skews farmer behaviour towards excessive urea use and under-application of phosphorus and potassium, undermining soil health and productivity.
The outcome is apparent in India’s nutrient-use profile. The N:P:K ratio has deteriorated to an alarming 10.9:4.4:1, far from the agronomically recommended 4:2:1. China offers a revealing counterpoint. With a smaller cropland base of 127.6 million hectares (mha) (arable land plus permanent crops), its agricultural gross value added (GVA) (including crops, livestock, forestry and fishing) was about $1.27 trillion in 2023 (World Bank), supported by fertiliser application of roughly 373 kg/ha and a far more balanced N:P:K ratio of 2.6:1.1:1. India, despite having a much larger cropland (168.3 mha), recorded agri-GVA of only $0.63 trillion — about half of China’s — with fertiliser consumption of 182 kg/ha. The agronomic consequences of distorted nutrient application are clearly reflected in India’s weaker productivity outcomes.
The agronomic fallout is visible across states. Punjab, often seen as India’s breadbasket, applies about 61 per cent more nitrogen than recommended, while underusing potassium by nearly 89 per cent and phosphorus by around 8 per cent, relative to the state’s recommended doses. Excess nitrogen produces lush green fields, but without adequate phosphorus and potassium, yields plateau and grain quality suffers. The illusion of abundance masks declining productivity and rising costs.
The divergence is rooted in policy design. In China, the government gives an aggregate input subsidy on a per unit of land (mu) basis directly to farmers and lets the fertiliser prices be market-determined. It results in innovative products — over 60 per cent of fertiliser consumption is through complex fertilisers compared to just 17 per cent in India. This underscores the failure of the NBS scheme to steer farmers towards integrated nutrient management.
The efficiency costs are equally sobering. Nutrient use efficiency (NUE) is estimated at just 35-40 per cent, implying that a majority of applied fertiliser never reaches the crop. Much of the lost nitrogen either escapes into the atmosphere as nitrous oxide, a greenhouse gas nearly 278 times more potent than carbon dioxide, or seeps into groundwater as nitrate, making groundwater non-potable. Ironically, a subsidy meant to boost food production is now amplifying environmental damage and harming human health. Nationwide, the fertiliser-to-grain response ratio has fallen from about 1:10 in the 1970s to barely 1:2.7 by 2015 in irrigated areas, alongside declining soil organic carbon. Adding to this is leakage: An estimated 20-25 per cent of subsidised urea is diverted to non-agricultural uses or smuggled across borders.
What, then, is the way forward? The best reform is to gradually dismantle price controls while protecting farmers through equivalent direct income support. A deregulated fertiliser market would spur innovation, improve efficiency, and restore correct price signals for balanced use of nitrogen, phosphorus and potassium. Promoting micronutrients and soluble fertilisers through fertigation and customised blends would further enhance productivity. However, the main constraint lies in identifying tenant farmers, many of whom remain outside formal land records. This can be addressed through triangulation of agricultural data, combining land records, PM-KISAN databases, fertiliser sales, crop sowing information, satellite imagery and procurement records. Advances in AI and machine learning can make such integration feasible.
A credible second-best option is to bring urea under the NBS regime, as was originally envisaged in 2010. Rationalising subsidies by reducing support for nitrogen while increasing it for phosphorus and potassium, without raising the overall subsidy bill, would correct price signals. Such recalibration would nudge farmers towards more balanced nutrient application, raising NUE and improving soil health.
Reforming the fertiliser subsidy regime demands political courage, but the rewards could be substantial. Our estimates show that annual savings of around Rs 40,000 crore are possible, which can be redirected towards agri-R&D, irrigation, and creating value chains in high-value agriculture. With precision farming and balanced nutrient use, the same land can generate far higher output, raise farm incomes, and stimulate rural demand for manufactured goods — setting off a virtuous cycle of growth.
Given the Goldilocks situation of high growth and low inflation, it is just the right time for the Prime Minister to bite this bullet and reform India’s fertiliser policy.
Gulati is distinguished professor at ICRIER and Juneja is research fellow at ICRIER. Views are personal
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