Fixing fertiliser subsidy: Pricing reform, targeted farmer support needed

Rising fertiliser subsidy exposes distortions in urea pricing, fuelling overuse and fiscal strain, highlighting need for direct farmer support and subsidy reform

The latest data from the Comptroller and Auditor General says India’s fertiliser-subsidy bill had crossed ₹1.87 trillion by February, breaching the revised estimate of the Budget even before the financial year 2025-26 ended. This is not a one-off fiscal slippage triggered by global price shocks or heightened geopolitical uncertainties. Instead, it reflects a deeper problem in the country’s agricultural policy, which is becoming fiscally costly, inefficient, and unsustainable. At the heart of the issue is how fertilisers are priced. Urea, the most widely used input, remains heavily subsidised, selling at around ₹270 per 45-kg bag, even as global prices have surged to nearly $850 per tonne. While this insulates farmers from volatility, it also distorts their behaviour. With nitrogen being far cheaper than other nutrients, farmers understandably use more of it. The result is a sharply imbalanced N:P:K (nitrogen-phosphorus-potassium) ratio, now at 10.9:4.1:1, well above the agronomic norm. Artificially low prices also create strong incentives for diversion and leakage. Earlier estimates suggested that a significant share of subsidised fertilisers did not reach the intended beneficiaries, being diverted to non-agricultural uses or even smuggled across borders. While reforms like point-of-sale authentication have improved tracking, underlying arbitrage remains. As long as there is a wide gap between domestic and global prices, leakages will persist in some form. 

The fiscal cost becomes even harder to justify. Fertiliser subsidy is one of the largest recurring items of expenditure for the government, and yet a portion of it does not translate into productive farm use. Even conservative estimates suggest that reducing leakages and improved targeting could yield substantial savings. In fact, these are resources that could be redirected towards irrigation, extension services, or investment in soil health. It has long been recognised that bringing urea under the nutrient-based subsidy (NBS) regime, on a par with phosphatic and potassic fertilisers, and rationalising the quantity of diammonium phosphate (DAP) would help align relative prices and encourage balanced nutrient use. Yet, this remains politically difficult. Any increase in urea prices is seen as a direct hit for farmers, making governments reluctant to act. The result is a status quo and price distortions remain largely unaddressed. 

In recent years, the government has leaned on technology to manage the problem. Platforms like Agristack aim to track fertiliser purchases and curb diversion, while the soil-health card provides farmers crop- and soil-specific guidance on nutrient use. While better information and targeting can improve outcomes, technology cannot be a substitute for getting prices right. Digital monitoring may reduce leakages at the margins, but it cannot eliminate the fundamental incentive to overuse a heavily subsidised input. A more durable solution lies in shifting from subsidising fertilisers to directly supporting farmers. This should involve bringing urea under the NBS regime, repurposing subsidies to incentivise the adoption of better farming practices, and linking support to the data on soil health. Gradual increases in urea prices while compensating farmers through direct, per-acre transfers should be considered an alternative to keeping prices artificially low. Such a framework would preserve farm incomes while restoring price signals that discourage overuse. Crucially, it would re-anchor fertiliser decisions in the specific needs of soil and crops rather than in distorted pricing, enabling a transition from blanket subsidies to more targeted, efficient, and sustainable support.