Shivanand Pandit
Recent figures released by the Comptroller and Auditor General of India reveal that India’s fertiliser subsidy expenditure has already exceeded ₹1.87 trillion by February 2026, overshooting the revised Budget estimate even before the financial year 2025–2026 concluded. This is not simply a temporary fiscal deviation caused by external shocks such as rising global fertiliser prices or geopolitical tensions. Instead, it highlights a deeper structural flaw in India’s agricultural policy framework—one that is increasingly burdensome on public finances, inefficient in resource allocation, and unsustainable in the long run.
The central issue lies in the way fertilisers are priced and subsidised, particularly urea. Urea remains the most widely used fertiliser in India and continues to be sold at a highly subsidised rate—around ₹270 per 45-kg bag—despite international prices reaching approximately $850 per tonne. While this pricing policy protects farmers from volatile global markets and ensures affordability, it also creates unintended distortions in agricultural practices. Since nitrogen (a key component of urea) is significantly cheaper than other essential nutrients like phosphorus and potassium, farmers tend to overuse it. This has led to a serious imbalance in the N:P:K ratio, currently estimated at about 10.9:4.1:1, far exceeding the recommended agronomic balance of roughly 4:2:1. Such disproportionate nutrient application gradually depletes soil quality, reduces crop productivity over time, and increases vulnerability to pests and diseases.
Artificially low fertiliser prices also generate strong incentives for misuse and diversion. When there is a substantial gap between subsidised domestic prices and higher international prices, arbitrage opportunities arise. Fertilisers meant for agricultural use may be diverted to industrial purposes or illegally exported to neighbouring countries. Although measures like point-of-sale authentication and digital tracking have improved transparency and monitoring, they have not fully eliminated leakages because the underlying economic incentive persists.
From a fiscal standpoint, the fertiliser subsidy represents one of the largest recurring expenditures for the government. However, a notable portion of this spending does not translate into productive agricultural outcomes due to inefficiencies, misuse, and poor targeting. Even conservative assessments suggest that reducing leakages and improving delivery mechanisms could save substantial public resources. These savings could instead be redirected toward more productive investments such as irrigation infrastructure, agricultural research, extension services, and soil health improvement—areas that offer long-term benefits for farm productivity and sustainability.
India needs structural reforms, particularly the inclusion of urea under the nutrient-based subsidy (NBS) system, which already governs phosphatic and potassic fertilisers. The Nutrient-Based Subsidy Scheme links subsidies to nutrient content rather than specific products, thereby encouraging balanced fertiliser use. Similarly, rationalising subsidies on fertilisers like diammonium phosphate (DAP) would help correct relative price distortions. However, implementing such reforms remains politically sensitive. Any increase in urea prices is often perceived as a direct burden on farmers, making policymakers hesitant to take decisive action.
In recent years, the government has increasingly relied on technological interventions to address inefficiencies. Initiatives like AgriStack aim to create a comprehensive digital ecosystem for tracking fertiliser usage and farmer data, while the Soil Health Card Scheme provides farmers with customised recommendations based on soil conditions. While these tools enhance information flow and improve targeting, they cannot substitute for correcting price distortions. Technology may reduce inefficiencies at the margins, but it cannot counteract the strong economic incentives that encourage overuse of subsidised inputs.
A more sustainable approach would involve shifting from input-based subsidies to direct income support for farmers. This would include bringing urea under the NBS framework, gradually rationalising its price, and compensating farmers through direct benefit transfers linked to landholding or acreage. Such a system would maintain farmers’ income security while restoring appropriate price signals, thereby promoting balanced and efficient fertiliser use. Additionally, linking financial support to soil health data could encourage environmentally sustainable farming practices and better nutrient management.
Downsides of Fertiliser Subsidies
Fertiliser subsidies, while designed to support agricultural productivity, have led to significant soil degradation and nutrient imbalance over time. Because nitrogen-based fertilisers such as urea are heavily subsidised, farmers tend to apply them in excessive quantities while underusing other essential nutrients like phosphorus and potassium. This skewed application disrupts the natural nutrient composition of the soil, weakening its structure and reducing its organic content. Over the long term, such imbalance diminishes soil fertility, lowers crop yields, and makes the land increasingly dependent on chemical inputs, creating a cycle of declining productivity and rising input use.
Another major concern is the environmental damage caused by the overuse of subsidised fertilisers. When excessive fertilisers are applied, plants are unable to absorb all the nutrients, leading to runoff into nearby rivers, lakes, and groundwater systems. This runoff contributes to eutrophication, a process where water bodies become overly enriched with nutrients, causing excessive growth of algae and depletion of oxygen levels, which harms aquatic life. Additionally, the overuse of nitrogen fertilisers releases nitrous oxide, a potent greenhouse gas, into the atmosphere. This not only contributes to climate change but also undermines efforts toward sustainable agricultural and environmental practices.
Fertiliser subsidies also impose considerable fiscal stress on the government. As global fertiliser prices rise and domestic prices remain artificially low, the subsidy burden increases substantially. This results in a large portion of public expenditure being allocated to maintaining these subsidies year after year. Consequently, the government’s capacity to invest in other critical sectors—such as healthcare, education, rural infrastructure, and agricultural research—is constrained. The opportunity cost of such high spending becomes particularly significant in a developing economy where resources are limited and competing priorities are numerous.
In addition, the system is plagued by leakages and inefficiencies. Due to the large gap between subsidised domestic prices and higher market prices elsewhere, fertilisers are often diverted from their intended agricultural use. Some quantities are misused for industrial purposes, while others are smuggled across borders for profit. Despite improvements in monitoring and distribution systems, a portion of the subsidy still fails to reach genuine farmers. This not only reduces the effectiveness of government spending but also undermines the objective of supporting agricultural productivity.
Finally, fertiliser subsidies contribute to distorted agricultural practices. By keeping certain inputs artificially cheap, they influence farmers’ decisions in ways that are not aligned with agronomic best practices. Instead of adopting balanced fertilisation techniques or exploring sustainable alternatives such as organic farming, integrated nutrient management, or precision agriculture, farmers tend to rely heavily on subsidised inputs. This distortion discourages innovation and the adoption of environmentally friendly practices, ultimately affecting the long-term sustainability and resilience of the agricultural sector.
Upsides of Fertiliser Subsidies
Fertiliser subsidies play an important role in supporting farmers’ incomes, particularly for small and marginal cultivators who form the backbone of Indian agriculture. By lowering the cost of key inputs such as urea and other fertilisers, these subsidies make farming more financially viable. Without such support, many farmers would struggle to afford adequate nutrient inputs, which could reduce their crop output and income levels. In this sense, subsidies act as a form of indirect income support, helping farmers manage production costs, cope with uncertainties, and sustain their livelihoods in a sector that is already vulnerable to risks like weather variability and market fluctuations.
Another significant benefit of fertiliser subsidies is their contribution to food security. Affordable access to fertilisers encourages farmers to use them more widely, which enhances soil nutrient availability and boosts crop yields. Over time, this has been a key factor in increasing agricultural output and ensuring that the country can meet the food demands of its large and growing population. By enabling consistent and higher production of staple crops, subsidies have helped reduce dependence on imports and strengthened national food self-sufficiency.
Fertiliser subsidies also provide protection against global price volatility, which is especially important in a world where fertiliser markets are influenced by international supply chains, energy prices, and geopolitical developments. By keeping domestic fertiliser prices relatively stable, the government shields farmers from sudden spikes in input costs. This stability allows farmers to plan their cropping patterns and investments with greater certainty, reducing the financial risks associated with unpredictable market conditions.
Finally, fertiliser subsidies have historically contributed to agricultural growth and transformation, particularly during critical phases such as the Green Revolution. The widespread availability of affordable fertilisers enabled farmers to adopt high-yielding crop varieties and modern farming techniques, leading to a substantial increase in agricultural productivity. Even today, these subsidies continue to support production levels by ensuring that farmers have access to essential inputs. As a result, they remain an important factor in sustaining agricultural output and supporting the overall growth of the rural economy.
In summary, while fertiliser subsidies have historically contributed to agricultural growth and food security, their current design is increasingly inefficient and unsustainable. A transition toward direct income support, better targeting, and rational pricing—combined with investments in sustainable agriculture—would create a more balanced system. This would not only ease fiscal pressures but also promote healthier soils, efficient nutrient use, and long-term agricultural resilience.
