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?

• 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.

• 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.

• 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.

• 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.

• 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:

• 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.

• 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.

• 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.

• 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.

• 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:

• 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.

• 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.

• 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.

• 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.

• 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.

Q. What do you understand by ‘Agri Stack? Discuss its use for better targeting of fertiliser subsidy. (250 words)