By Ashok Gulati & Ritika Juneja, Respectively Distinguished Professor and Research Fellow at ICRIER
Prime Minister Narendra Modi has set a national wide-ranging reform drive in motion. From income tax, goods and services tax (GST) to labour laws, insurance, free trade agreements, and now even the employment scheme-everything is under a churn. The idea is to sustain GDP growth above 7% amid intensifying geopolitical risks, including Donald Trump’s tariff pressures. Yet, one crucial sector that has largely escaped reform is agriculture. Perhaps it is still constrained by the political aftershocks of the earlier farm laws. But the exploding fertiliser subsidy, expected to touch Rs 2 lakh crore against a Union Budget of Rs 51 lakh crore in FY26, demands urgent attention. This is not a call to withdraw support, but to reorient it so that it gives the biggest bang for the buck.
Fertiliser subsidy is the second-largest item in the Union Budget (next only to food subsidy) and larger than the entire allocation for the ministry of agriculture and farmers’ welfare (Rs 1.37 lakh crore in FY26). Its rapid increase reflects rising fertiliser consumption and escalating input costs, amplified by India’s heavy import dependence-around 78% of natural gas going for urea production, nearly 90% for phosphatic fertilisers (raw materials or finished products), and total reliance on imports for potash. Given the volatility in energy prices and commodity markets, this makes the subsidy fiscally precarious and geopolitically vulnerable.
Urea sits at the heart of this distortion. Nearly two-thirds of the fertiliser subsidy goes to urea, sold at a fixed price of Rs 242 per 45-kg bag-among the cheapest globally. In contrast, diammonium phosphate and muriate of potash prices have been decontrolled and a fixed subsidy is given linked to nutrient content rather than fixed retail prices under the Nutrient-Based Subsidy (NBS) regime since 2010. This sharp price asymmetry skews farmer behaviour towards excessive use of urea and under-application of phosphorus and potassium, undermining soil health and productivity.
The outcome is starkly visible in India’s nutrient-use profile. The national nitrogen, phosphorus, and potassium (NPK) ratio has deteriorated to an alarming 10.9:4.4:1, far from the agronomically recommended 4:2:1. China offers a revealing counterpoint. With a smaller cropland base of 127.6 million hectares (mha) (arable land plus permanent crops), it generated agricultural gross value added (GVA) (including crops, livestock, forestry, and fishing) of about $1.27 trillion in 2023 (World Bank), supported by fertiliser application of roughly 373 kg/ha and a far more balanced NPK ratio of 2.6:1.1:1. India, despite having a much larger cropland (168.3 mha), recorded an agri-GVA of only $0.63 trillion-about half of China’s-with fertiliser consumption of 182 kg/ha. The agronomic consequences of distorted nutrient application are clearly reflected in India’s weaker productivity outcomes.
The agronomic fallout is visible across states. Punjab, often seen as India’s breadbasket, applies about 61% more nitrogen than recommended while underusing potassium by nearly 89% and phosphorus by around 8% relative to the state’s recommended doses. Excess nitrogen produces lush green fields, but without adequate phosphorus and potassium, yields plateau and grain quality suffers. The illusion of abundance masks declining productivity and rising costs.
The divergence is rooted in policy design. In China, the government gives aggregative input subsidy on per unit of land basis directly to farmers and lets the fertiliser prices be market-determined. It results in innovative products-over 60% of fertiliser consumption is through complex fertilisers compared to just 17% in India. This underscores a failure of the NBS scheme to steer farmers towards integrated nutrient management.
The efficiency costs are equally sobering. Nutrient use efficiency (NUE) is estimated at just 35-40%, implying that a majority of applied fertiliser never reaches the crop. Much of the lost nitrogen either escapes into the atmosphere as nitrous oxide, a greenhouse gas nearly 278 times more potent than carbon dioxide, or seeps into groundwater as nitrate, making groundwater non-potable. Ironically, a subsidy meant to boost food production is now amplifying environmental damage and harming human health. Nationwide, fertiliser-to-grain response ratio has fallen from about 1:10 in the 1970s to barely 1:2.7 by 2015 in irrigated areas, alongside declining soil organic carbon. Adding to this is leakage: an estimated 20-25% of subsidised urea is diverted to non-agricultural uses or smuggled across borders.
What, then, is the way forward? The best reform is to gradually dismantle price controls while protecting farmers through equivalent direct income support. A deregulated fertiliser market would spur innovation, improve efficiency, and restore correct price signals for balanced use of NPK. Promoting micronutrients, soluble fertilisers through fertigation, and customised blends would further enhance productivity. However, the main constraint lies in identifying tenant farmers, many of whom remain outside formal land records. This can be addressed through triangulation of agricultural data, combining land records, PM-KISAN databases, fertiliser sales, crop sowing information, satellite imagery, and procurement records, etc. Advances in artificial intelligence and machine learning can make such integration feasible.
A credible second-best option is to bring urea under the NBS regime, as was originally envisaged in 2010. Rationalising subsidies by reducing support for nitrogen while increasing it for phosphorus and potassium without raising the overall subsidy bill would correct price signals. Such recalibration would nudge farmers towards more balanced nutrient application, thus raising NUE and improving soil health.
Reforming the fertiliser subsidy regime demands political courage, but the rewards could be substantial. Our estimates show that annual savings of around Rs 40,000 crore is possible, which can be redirected towards agri-research and development, irrigation, and the creation of value chains in high-value agriculture. With precision farming and balanced nutrient use, the same land can generate far higher output, raise farm incomes, and stimulate rural demand for manufactured goods-setting off a virtuous cycle of growth.
Given the Goldilocks situation of high growth and low inflation, it is time for the PM to bite this bullet and reform India’s fertiliser policy.