Fertiliser Subsidy in India: Need of Pricing Reform, Targeted Farmer Support

Syllabus: GS3/Economy; Agriculture

Context

• Recent trends in India’s fertiliser subsidy, particularly of urea, has led to nutrient imbalance, fiscal stress, and environmental degradation, calling for urgent reforms in subsidy design and delivery, rather than optimal agricultural outcomes.

Need of Fertiliser Subsidy in India

• Ensuring Food Security: Fertilisers are essential for increasing crop productivity, and subsidy ensures affordable access, leading to higher yields.
  • It played a key role in the Green Revolution and self-sufficiency in food grains.
• Supporting Small and Marginal Farmers: Over 85% of farmers in India are small and marginal. Subsidy reduces input cost burden, making farming viable.
  • It acts as a form of income support, especially where credit access is limited.
• Stabilising Farm Income: Protects farmers from volatility in global fertiliser prices, and input cost shocks. It ensures predictable cost of cultivation.
• Promoting Agricultural Growth: It encourages use of modern inputs that lead to higher productivity, and contributes to overall agricultural GDP growth.
• Addressing Market Failures: Fertiliser markets are prone to price volatility, and supply constraints.
  • Government subsidy ensures availability and affordability across regions.
• Poverty Reduction & Rural Welfare: Lower input costs led to higher net returns for farmers.
  • It supports livelihoods and the rural economy.
• Strategic Importance for National Stability: Food security is linked to economic stability, social and political stability; and fertiliser subsidy indirectly supports national food systems.

Core Issues in Fertiliser Subsidy in India

• Fiscal Burden and Unsustainability: Fertiliser subsidy is one of the largest components of government expenditure. Rising global fertiliser prices increase subsidy outgo, and leads to crowding out of productive investments (irrigation, R&D).
• Price Distortion (Urea Bias): Urea is heavily subsidised and price-controlled, unlike P & K fertilisers under NBS.
  • It creates artificially low prices for nitrogen, distorting farmer choices.
• Imbalanced Use of Fertilisers (NPK Problem): Ideal N:P:K ratio is 4:2:1. India shows excess nitrogen use due to cheap urea, resulting in soil degradation, declining productivity, and micronutrient deficiency.
• Leakages, Diversion and Corruption: Subsidised fertilisers diverted to non-agricultural sectors (industry), black markets and cross-border smuggling due to price gap between domestic and global markets.
• Inefficient Targeting and Equity Issues: Subsidy is input-based, not income-based. Large farmers capture disproportionate benefits due to higher usage. Small and marginal farmers benefit relatively less.
• Environmental Degradation: Excess nitrogen leads to soil health deterioration, water pollution (eutrophication), and greenhouse gas emissions (N₂O).

Related Reforms & Efforts

• Nutrient-Based Subsidy (NBS) Scheme (2010): It was introduced for Phosphatic (P) and Potassic (K) fertilisers, and linked to nutrient content (N, P, K, S) rather than product.
  • It aims to promote balanced fertiliser use, and encourage competition and efficiency.
• Direct Benefit Transfer (DBT) in Fertilisers: Subsidy is paid to fertiliser companies after sale to farmers.
  • It is enabled through Point-of-Sale (PoS) machines, and Aadhaar authentication.
  • It aims to reduce leakages and diversion, and ensure real-time tracking of sales.
• Neem-Coated Urea (NCU): Mandatory coating of urea with neem oil. It benefits:
  • Reduces diversion to industrial use
  • Improves nitrogen-use efficiency
  • Slows nutrient release for better crop uptake
• Soil Health Card Scheme (2015): It provides farmers with soil nutrient status, and crop-specific fertiliser recommendations. It aims to promote balanced and scientific fertilizer use.
• New Urea Policy (2015): It focuses on maximising domestic production, reducing import dependence, and promoting energy efficiency in plants.
• Promotion of Nano Urea & Alternative Fertilisers: Introduction of Nano Urea (liquid fertiliser) by IFFCO. It aims to reduce conventional urea consumption, and improve efficiency and sustainability.
• Digital Agriculture Initiatives (AgriStack): It aims to create a digital database of farmers. It helps in better targeting of subsidies, and monitoring fertiliser usage.
• Freight Subsidy & Price Control Mechanisms: Government bears transport cost to ensure uniform fertiliser prices across India. It maintains affordability for farmers in remote areas.

What More is Needed: Pricing Reform & Targeted Farmer Support

• Pricing Reforms Needed
  • Bring Urea under Nutrient-Based Subsidy (NBS): Align nitrogen pricing with P & K fertilisers; and remove artificial price distortion.
  • Gradual Decontrol of Urea Prices: Avoid sudden shocks; adopt phased price increase; and maintain political feasibility.
  • Align Domestic Prices with Global Prices: Reduce arbitrage opportunities like leakage & smuggling; and need to improve efficiency of fertiliser markets.
  • Rationalise Subsidy on DAP and Complex Fertilisers: Avoid over-subsidisation of specific nutrients; and promote balanced nutrient use.
• Targeted Farmer Support (Income-Based Approach)
  • Shift from Input Subsidy To Direct Income Support: Replace fertiliser subsidy with per-acre transfers, and per-farmer income support (e.g., PM-KISAN-type expansion)
  • Link Subsidy to Landholding / Cropped Area: Better targeting than universal price subsidy; and reduces benefits to large farmers disproportionately.
  • Integrate Soil Health Data with Subsidy: Provide incentives for balanced fertiliser use; and crop-specific nutrient application.
  • Conditional Support for Sustainable Practices: Incentivise organic inputs / nano fertilisers, and precision farming; link payments to outcomes (soil health, efficiency).
  • Strengthen Digital Targeting (AgriStack + DBT 2.0): Use land records and crop data to ensure accurate beneficiary identification.

Conclusion

• India’s fertiliser subsidy problem is fundamentally a pricing and policy design issue rather than a temporary fiscal shock.
• While subsidies have supported food security, their current structure has led to imbalanced nutrient use, inefficiency, and rising fiscal costs. 
• Sustainable reform requires a shift from input-based subsidies to income and outcome-based support, ensuring both agricultural productivity and fiscal prudence.

Source: BS