Fixing Fertiliser: Urea subsidy cannot be allowed to continue unreformed

With fertiliser subsidies set to hit record levels, India faces growing pressure to reform urea pricing and shift support directly to farmers

Since the National Democratic Alliance government took office over a decade ago, it has made major changes to how its services and subsidies are delivered. Many of them have resulted in greater efficiency and increased fairness. These changes took advantage of new payment mechanisms as well as the vast increase in state capacity enabled by the Aadhaar and Digital Public Infrastructure. It is time now for the last unreformed subsidy, the one for fertiliser, to be addressed. This is because, in the shadow of the urea crisis, the incoherent and expensive structure of how India subsidises fertiliser usage can no longer be ignored. From late April till mid-May, Department of Fertilisers officials flagged the prospect of a 20 per cent spike in the ₹1.7 trillion fertiliser spend estimated in the Union Budget. Two weeks ago, they said it was impossible to predict the bill for this financial year and it might reach as much as ₹3 trillion. Now, that ask is learnt to have shot up further, with the department seeking a 100 per cent increase in budgetary allocation, citing the spike in the price of petrochemicals due to the blocking of the Strait of Hormuz and, therefore, of urea. This would take India’s fertiliser subsidy to a fresh high of ₹3.4 trillion in FY27, far beyond the previous peak of ₹2.5 trillion in FY23 after the Russia-Ukraine war broke out. 

This level of unpredictability and lack of control on expenditure cannot be allowed to continue. The root cause is that while phosphorus- and potassium-based fertilisers were allowed some degree of price adjustment, the price of urea has never been given the chance to reflect the drift in global prices. Over more than a decade, this has led to a situation where the government is shouldering about 90 per cent of the actual market cost. It was not the point of this subsidy to remove basic market incentives from the agricultural sector; it was to ensure the sector’s productivity did not fall to a level where food security is compromised. That problem can be solved equally well in other ways. Leaving aside efficiency, it is also necessary to change the current subsidy architecture for the sake of transparency, fairness, and, not in the least, environmental concerns. Whenever enormous differences creep in between a market price and an administered one, black-marketing and diversion become common. This is certainly the case with urea today. The fact that urea is much cheaper also means that the ratio of fertilisers used by farmers skews towards it, leading to serious soil degradation. Finally, fairness is important: The urea subsidy is overwhelmingly taken up by large wheat and rice farmers, who are concentrated in certain parts of the country. This must be addressed — and a distinction is necessary to provide enough for one’s needs rather than keep forking out what one has got used to getting away with, due to extant systemic flaws. 

It is past time for India to move to a modern system to support agriculture. This might of course involve making changes to public procurement. But it will also require the government to expend political capital on shifting towards a nutrient-based subsidy regime, one in which benefits are directly transferred to the farmer ploughing the field rather than to the companies that are producing urea. It might be recalled that this was one of the first major attempted thrusts of the original liberalisation programme in 1991, announced in Manmohan Singh’s famous speech — but was swiftly reversed because of the political outcry. That, 35 years on, the system is still financially unsustainable is an indictment of successive governments. It falls now to this government, also facing external difficulties not of its own making, to act where others have failed.