By Ashok Gulati, Distinguished Professor, ICRIER
Prime Minister Narendra Modi says that his government is in “Reform Express” mode, having carried out several reforms ranging from income tax, goods and services tax, and the Guarantee for Rozgar and Ajeevika Mission (Gramin) to free trade agreements and so on. All of this is commendable. One could thank President Donald Trump for giving India a tariff shock, which stirred the Modi government to initiate reforms, many of which were overdue. The results so far have been better than expected. The first advance estimates project the Indian economy to be growing at 7.4% in FY26. Consumer inflation is also down to 1.3% in December 2025. But will this performance repeat itself in FY27, even if the trade deal with the US remains uncertain? The answer is not very clear, but a lot will depend upon how much more domestic reforms the Modi government can undertake.
Here are a few areas in the agri-food space that are crying for reform for a long time.
Let us begin by noting that the agri-GDP growth is likely to be only 3.1% in FY26, which is quite a drop from 4.6% in FY25. What is less known is that the primary reason why consumer price inflation is so low is a collapse in some food prices. Onion prices are down by 48% in December compared to last year’s level; potato prices are down by 35%, and all major pulses are selling at 10-30% below their respective minimum support prices (MSPs).
Where is the emergency support coming from the government? Under such a depressed price scenario, it is not feasible for the government to achieve its objective of atmanirbharta (self-sufficiency) in pulses, irrespective of its mission on pulses and oilseeds. We need crop-neutral incentive structures, which currently are heavily skewed in favour of water- and fertiliser-intensive crops like rice, sugarcane, and wheat. It is because of massive subsidies doled out by the states and the Centre in the form of free or highly subsidised power and fertilisers, especially urea. And this gets compounded by open-ended procurement of these crops in some states at least.
If the Modi government is really on “Reform Express” mode, it needs to reform at least two items in the Union Budget. The food subsidy is likely to touch Rs 2.25 lakh crore, and fertiliser subsidy may go up to Rs 2 lakh crore, in a total budget of around Rs 51 lakh crore. Together these are about 8-8.5% of the Union Budget. Both are operating at a sub-optimal level to say the least. Let me explain in detail.
Food subsidy is the difference between the economic cost of procuring, stocking, and distributing rice and wheat by the Food Corporation of India (FCI), and the price received from the beneficiaries of the public distribution system (PDS). In case of rice, the economic cost is hovering around Rs 42/kg, and in case of wheat around `30/kg to FCI. It gives free 5 kg of rice or wheat to about 813 million people under the PM’s Garib Kalyan Yojana. It amounts to covering roughly 56% of the current population of around 1.45 billion.
The introduction of point of sale (POS) machines in more than 5 lakh fair price shops (FPS) was a significant reform by the Modi government, which helped it to reduce massive leakages in PDS. But how rational is giving free food to 56% of the population, when according to World Bank’s definition of extreme poverty ($3 per capita/day/in purchasing power parity [PPP] terms at 2021 prices), India’s poverty has come down to just 5.3% in 2022? Even with a higher poverty line of $4.2/per capita/day, poverty in India was about 24%. One can argue that the extremely poor (antyodaya) need to be given free food. From that standpoint, only about 5% of the population deserve free food, while others should pay at least half of the MSP. If not,
then this policy is nothing but the biggest political revdi (dole) that the government is giving to consumers for their votes. It gives free rice even to rice growers! This is the height of irrationality as these growers first give all their paddy to the government and then get back free rice with an enhanced economic cost and subsidy.
How can one reform this system? Coverage must be scaled down gradually from the current levels to 40% of the population, then to 25%, and finally to about 15%. If it does not have the political courage to do so, then the Centre should at least directly transfer cash to rice and wheat producers. Further, at least 20% of FPS should be converted to nutrition hubs having pulses, oilseeds, milk, eggs, fruits, vegetables, etc., which are more nutritious than just wheat and rice. Beneficiaries at these FPS can be given food coupons to buy this more diversified food for better nutrition.
Now, let us turn to fertiliser subsidy. It is the second largest subsidy (about Rs 2 lakh crore) in the Union Budget, bigger than the entire budget of the ministry of agriculture and farmers’ welfare (MoAFW) (Rs 1.37 lakh crore). It is well known that excessive subsidy on urea is nothing short of subsidising poison. Urea is not being used in a balanced manner with phosphatic and potassic fertilisers, leading to contamination of groundwater and swelling greenhouse gas emissions.
A sizeable part (20-25%) is also leaking away. The solution is to transfer cash directly to farmers’ accounts, and loosen control on fertiliser pricing. If the government can’t do that, then it should at least bring urea under the Nutrient Based Subsidy and give the same subsidy as for diammonium phosphate and muriate of potash. Also, fertiliser subsidy must be shifted from the department of fertilisers to the MoAFW, which is dealing with farmers directly. And if both food and fertiliser subsidies can be merged with an augmented PM-Kisan, then the Modi government is truly on a “Reform Express” mode.