Reforming the fertiliser subsidy demands political courage, offers high rewards

Why in News:

Government of India has not taken any major reform on Agricultural sector

UPSC Relevance:

GS-III (Agriculture, Economy, Environment), GS Paper II (Government Policies & Interventions)

PYQ:

With reference to chemical fertilizers in India, consider the following statements:

1.At present, the retail price of chemical fertilizers is market-driven and not administered by the Government.
2.Ammonia, which is an input of urea, is produced from natural gas.
3.Sulphur, which is a raw material for phosphoric acid fertilizer, is a by-product of oil refineries.

Which of the statements given above is/are correct?
a) 1 only
b) 2 and 3 only
c) 2 only
d) 1, 2 and 3

Context & Background:

• The Government of India has undertaken major structural reforms in taxation (GST), labour laws, insurance, trade agreements, and welfare delivery.
• Agriculture, however, remains largely unreformed due to:
  • Political sensitivity
  • Fallout from the repealed farm laws
• Meanwhile, the fertiliser subsidy has ballooned:
  • ₹2 lakh crore (FY26) out of a total Union Budget of ₹51 lakh crore
  • Second largest subsidy after food
• This makes fertiliser subsidy:
  • A fiscal concern
  • An agronomic problem
  • An environmental threat

There is a need for restructuring it intelligently.

Structure of the Fertiliser Subsidy (What is wrong?)

(a) Import Dependence & Fiscal Vulnerability:

India is heavily import-dependent:

• 78% natural gas (for urea)
• ~90% phosphatic fertilisers (DAP) (Diammonium Phosphate)
• 100% potash (MOP) (Muriate of Potash)

-> This exposes India to:

• Energy price shocks
• Geopolitical risks
• Volatile global commodity markets

(b) Urea-Centric Distortion:

• Two-thirds of subsidy goes to urea
• Urea price in India is among the cheapest globally
• Leads to overuse of nitrogen and underuse of Phosphorus (P) and Potassium (K)

Agronomic Impact:

(a) Nutrient Imbalance

• Ideal N:P:K ratio → 4:2:1
• India’s current ratio → 10.9:4.4:1

-> Excess nitrogen:

• Weakens soil structure
• Reduces crop response
• Lowers grain quality over time

(b) State-Level Evidence (Punjab)

• Nitrogen: +61% over recommended
• Potassium: −89%
• Phosphorus: −8%

-> Result:

• Lush green fields
• Plateauing yields
  • A yield plateau is when the amount of crop produced per area stops increasing, or even decreases, after a period of significant growth (like after the Green Revolution). It signals that farmers are reaching the maximum potential output for a crop in a specific region
• Rising input costs
• Illusion of productivity

Productivity & Global Comparison (Data-based argument):

India vs China:

-> Despite more land, India produces half the agri output of China.

Key Insight:
China subsidises farmers directly per unit land, not fertilisers.

Environmental & Efficiency Costs:

(a) Low Nutrient Use Efficiency (NUE)

• Only 35–40% fertiliser reaches crops
• Rest is lost as:
  • Nitrous oxide (N₂O) → 278× more potent than CO₂
  • Nitrate leaching → groundwater contamination

(b) Declining Fertiliser Response

• 1970s: 1 kg fertiliser → 10 kg grain
• 2015: 1 kg fertiliser → 2.7 kg grain

-> Indicates:

• Soil degradation
• Declining organic carbon
• Unsustainable intensification

(c) Leakage & Diversion

• 20–25% of urea:
  • Diverted to industry
  • Smuggled across borders

What is Nutrient-Based Subsidy (NBS) and why it is failed in India:

What was NBS supposed to do? (Intent)

• Nutrient-Based Subsidy (NBS), 2010 was introduced to:
• Move away from product-based subsidy (subsidy on fertiliser bags)
• Shift to nutrient-based subsidy (N, P, K, S per kg)
• Allow market pricing of fertilisers
• Encourage balanced fertiliser use
• Promote innovation (customised & complex fertilisers)

 In theory, this was a scientific and market-friendly reform.

What actually happened? (Design flaw)

Key mistake: Partial reform

•  This created a dual pricing system.

Why was urea kept outside NBS?

Political Economy Reasons:

• Urea is used by small and marginal farmers
• Cheap urea = visible welfare
• Fear of:
  • Farmer protests
  • Food inflation
  • Electoral backlash

 Hence, political compulsions overrode agronomic logic.

Price Asymmetry: The Core Problem

Because of this policy:

• Urea price → Artificially cheap (₹242 per bag)
• DAP & MOP prices → Market-linked and volatile

Farmer’s Rational Response:

“Why buy expensive DAP or MOP when urea is cheap?”

-> Farmers overuse nitrogen
-> Farmers underuse phosphorus & potassium

This is called price-induced nutrient imbalance.

How this distorted farmer behaviour?

Ideal (Recommended):

• N:P:K = 4:2:1

Actual (India):

• N:P:K = 10.9:4.4:1

-> Excess nitrogen causes:

• Poor root development
• Lodging of crops
• Lower grain quality
• Declining long-term yields

Failure to promote complex fertilisers?

What are complex fertilisers?

• Fertilisers containing multiple nutrients in one granule
• Example: NPK blends customised for soil & crop

Outcome in India:

• Only 17% fertiliser use is via complex fertilisers

Why?

• Farmers prefer cheap urea + minimal DAP
• No price incentive for balanced nutrients

China’s contrasting success (Why comparison matters)

China’s policy approach:

• No price control on fertilisers
• Direct subsidy to farmers per unit land
• Fertiliser prices reflect real costs

Result:

• Farmers demand balanced & customised fertilisers
• 60%+ fertiliser use via complex blends
• Better nutrient efficiency
• Higher productivity

 Key lesson:
Subsidise the farmer, not the fertiliser.

Reform Options?

Option 1: Best Reform (First Best Solution)

🔹 Dismantle price controls
🔹 Direct income support to farmers
🔹 Market-determined fertiliser prices

Benefits:

• Correct price signals
• Balanced nutrient use
• Innovation (customised & micronutrient blends)
• Higher productivity & Nutrient Use Efficiency (NUE)

Challenge:

• Identifying tenant farmers

Solution:

• Data triangulation using:
  • Land records, PM-KISAN
  • Fertiliser sales, Crop sowing data
  • Satellite imagery, Procurement records
  • AI & ML tools

Option 2:

🔹 Bring urea under NBS
🔹 Reduce nitrogen subsidy
🔹 Increase P & K subsidy
🔹 No increase in overall subsidy bill

Impact:

• Nudges balanced fertiliser use
• Improves soil health
• Raises productivity gradually

Economic Payoff (Why reform is worth it)

• Estimated annual savings: ₹40,000 crore
• Funds can be redirected to:
  • Agri-R&D
  • Irrigation
  • High-value agriculture
  • Value chains & food processing

-> Leads to:

• Higher farm incomes
• Increased rural demand
• Manufacturing growth
• Virtuous growth cycle

Political Economy Angle:

• Fertiliser reform requires political courage
• But current conditions are favourable:
  • High GDP growth
  • Low inflation
  • Digital infrastructure (DBT, AI)
• This a “Goldilocks moment”:
  • Neither too hot nor too cold for reform

Reforming fertiliser subsidy is not about withdrawing state support, but realigning incentives with agronomic science, environmental sustainability, and fiscal prudence. A shift from product-based subsidies to farmer-centric income support can enhance productivity, protect natural resources, and strengthen India’s long-term food security. The costs of inaction are rising, while the rewards of reform are transformative.