After a few years of relative regulation, the budgetary expenditure on explicit subsidies may spiral out of control again. Because the West Asia war is inflating import costs for key fertilisers and their inputs, government officials have stated that the subsidy on soil nutrients in FY27 could exceed the Budget Estimate (BE) of Rs 1.7 lakh crore by at least Rs 35,000 crore.
Nearly 30% of both urea and diammonium phosphate consumed in the country are imported from the Gulf region, as is half of the liquefied natural gas (LPG), the feedstock for urea production. A host of other key raw materials and intermediates are also imported via the Strait of Hormuz where traffic has remained largely disrupted. Urea accounts for two-thirds of the fertiliser subsidy, and imports still meet nearly a quarter of its domestic consumption.
Over three-fourths of the natural gas used for urea manufacturing, 90% of phosphatic fertilisers, and 100% of potash are also imported. Global urea prices entered a phase of high volatility after the start of the war: they have surged and a much higher average level is forecast for the next 12 months. Similarly, spot liquefied natural gas prices nearly doubled and landed cost of phosphates climbed 30%. Officials assert that no fertiliser shortage will be felt in the coming kharif season, but fertiliser companies continue to sound a note of caution.
Import Trap
This means that fertiliser subsidies and availability remain highly exposed to external shocks. The last time a global conflict jacked up these subsidies were in FY23, as supplies through the Red Sea were choked by the Ukraine-Russia conflict. What’s more disturbing is a simultaneous spike in food subsidy. This, in contrast, has little to do with external factors. According to official estimates, rising costs of holding huge public stockpiles of rice and wheat would increase food subsidy by `20,000 crore from the BE of Rs 2.27 lakh crore for FY27.
Subsidies on food, fertilisers, and petroleum (LPG) fell to 8.1% of the Budget in FY24, down from 11% in FY23, but have since risen to 8.7% in FY26 (Revised Estimate). This was also due to curbs imposed on the Budget size by a government undergoing fiscal consolidation. This rising trend will accelerate this year, compressing government resources for growth-inducing expenditure. As a fraction of the GDP, the three explicit subsidies have still been reduced from 2% in FY23 to 1.2% (RE) in FY26. What makes the latest subsidy spike more challenging, however, is that it coincides with reduced tax revenue buoyancy.
Reforming the Safety Net
Incremental, tech-enabled steps to improve subsidy delivery and targeting—like grain distribution using electronic point of sale devices and biometric Aadhaar authentication of beneficiaries—are obviously not enough to rein in subsidy expenditure. Neither is the still-in-infancy direct transfer of fertiliser subsidy to farmers. The project to create modern grain storage facilities in the cooperative sector can help, but only to an extent.
A steeper reduction in subsidy spending growth would doubtless require a rational review of the criteria for the National Food Security Act’s beneficiary pool of 810 million people. Besides, as the Economic Survey recommended, the government should immediately implement a modest increase in retail issue prices for highly subsidised urea, while simultaneously transferring an equivalent cash amount directly to farmers based on their landholdings. There is a dire need to anchor fertiliser decisions in soil and crop requirements, rather than in “administered price distortions”.