Reforming Fertiliser Subsidy in India: Need, Challenges, and the Way Forward

Reforming the fertiliser subsidy in India has emerged as one of the most critical yet politically sensitive economic reforms. The fertiliser subsidy is currently the second-largest expenditure item in the Union Budget, next only to the food subsidy. For FY26, fertiliser subsidy spending is expected to reach ₹2 lakh crore, exceeding the total allocation for the Ministry of Agriculture and Farmers’ Welfare. While the subsidy plays a vital role in supporting farmers and ensuring food security, its existing structure has led to market distortions, declining soil health, fiscal stress, and environmental damage.

This article examines why fertiliser subsidy reform is urgently needed, the challenges involved, global best practices, and a sustainable roadmap for India.

What Is Fertiliser Subsidy in India?

Fertiliser subsidy is a government support mechanism that ensures fertilisers are sold to farmers at below-market prices. India subsidises three key nutrients:

• Nitrogen (N) – mainly through urea

• Phosphorus (P) – through DAP and complex fertilisers

• Potassium (K) – through MOP

Urea Price Control

• Urea is sold at a fixed price of ₹242 per 45-kg bag

• Nearly two-thirds of total fertiliser subsidy goes to urea alone

• India imports about 78% of natural gas used for urea production

Nutrient-Based Subsidy (NBS) Regime

• Introduced in 2010 for phosphatic and potassic fertilisers

• Subsidy linked to nutrient content, not fixed retail prices

• Urea remains outside NBS, creating major price asymmetry

Why Reforming Fertiliser Subsidy Is Necessary

1. Fiscal Burden on the Government

• Fertiliser subsidy has ballooned due to:

  • Rising global energy prices

  • Heavy import dependence

  • Increasing fertiliser consumption

• Makes India’s fiscal position vulnerable to geopolitical shocks

2. Distorted Nutrient Use

• Excessive use of nitrogen due to cheap urea

• Underuse of phosphorus and potassium

• India’s current N:P:K ratio: 10.9:4.4:1

• Recommended agronomic ratio: 4:2:1

3. Declining Agricultural Productivity

• Fertiliser-to-grain response ratio fell from 1:10 in the 1970s to 1:2.7

• Soil organic carbon levels declining

• Yield stagnation despite higher fertiliser use

Environmental and Health Impacts

Low Nutrient Use Efficiency (NUE)

• Estimated NUE: 35–40%

• Majority of fertiliser does not reach crops

Environmental Damage

• Nitrogen losses as nitrous oxide, a greenhouse gas nearly 278 times more potent than CO₂

• Nitrate contamination of groundwater

• Eutrophication of water bodies

Leakage and Misuse

• 20–25% of subsidised urea diverted to:

  • Non-agricultural uses

  • Smuggling across borders

State-Level Evidence: The Punjab Example

Punjab applies:

• 61% more nitrogen than recommended

• 89% less potassium

• 8% less phosphorus

This results in:

• Lush crop appearance but stagnant yields

• Poor grain quality

• Rising input costs for farmers

Global Comparison: Lessons from China

China provides direct per-land income support while allowing fertiliser prices to reflect market realities. Over 60% of fertilisers used in China are complex fertilisers, compared to 17% in India.

Challenges in Reforming Fertiliser Subsidy

Political Sensitivity

• Fear of farmer backlash due to past farm law protests

• Fertiliser prices are politically emotive

Identification of Beneficiaries

• Large number of tenant farmers

• Incomplete land records

Transition Risks

• Short-term price rise

• Need for robust compensatory mechanisms

Policy Options for Reform

Option 1: Gradual Deregulation with Direct Income Support (Best Option)

• Phase out price controls on fertilisers

• Transfer equivalent subsidy directly to farmers

• Benefits:

  • Correct price signals

  • Encourage balanced nutrient use

  • Promote innovation and efficiency

Enablers

• Integration of:

  • PM-KISAN database

  • Land records

  • Fertiliser sales data

  • Satellite imagery

  • Crop sowing records

• Use of AI and machine learning for beneficiary identification

Option 2: Bring Urea Under Nutrient-Based Subsidy (Second-Best Option)

• Extend NBS to urea

• Reduce subsidy on nitrogen

• Increase subsidy on phosphorus and potassium

• Maintain overall subsidy level

• Politically more feasible in the short term

Expected Benefits of Reform

• ₹40,000 crore annual savings

• Funds can be redirected to:

  • Agricultural R&D

  • Irrigation infrastructure

  • Precision farming

  • High-value agriculture value chains

• Improved soil health and sustainability

• Higher farm incomes and rural demand

• Long-term food security

Conclusion

Reforming the fertiliser subsidy in India is not about withdrawing farmer support, but redesigning it to deliver better outcomes. The current system is fiscally costly, environmentally damaging, and agronomically inefficient. With India enjoying a phase of high growth and low inflation, the moment is ripe for bold reform. Political courage today can unlock sustainable agricultural growth, improve farmer welfare, and strengthen India’s long-term economic resilience.

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