India’s fertiliser subsidy is again under pressure. The Union Budget for 2026-27 provides ₹1.71 lakh crore for fertiliser subsidy, including ₹1.17 lakh crore for urea and ₹54,000 crore for nutrient-based subsidy. The revised estimate for 2025-26 was already higher at ₹1.86 lakh crore. Fresh increases in global fertiliser and energy prices, linked to supply disruptions in West Asia, could push the bill beyond ₹2 lakh crore again.
This is not merely a fiscal problem. It is a design problem. India still subsidises fertiliser consumption rather than farmer income. The system was built for a different agricultural economy. It helped raise cereal output after the Green Revolution, but now rewards input intensity, entrenches regional inequality and worsens soil stress.
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Fertiliser subsidy and urea price distortion
Urea remains the clearest example of this distortion. A 45 kg bag is sold to farmers at a statutory maximum retail price of ₹242, excluding neem coating charges and taxes. The price has remained unchanged since March 2018. The government pays the difference between the farm-gate cost and the net realisation of fertiliser producers or importers.
In 2023, the government said the actual cost of a urea bag was around ₹2,200, while the farmer paid ₹242. The fiscal gap is therefore absorbed by the exchequer. This protects farmers from sudden input shocks. It also makes the subsidy open-ended. Every increase in imported gas, ammonia, urea or freight costs is transmitted to the Budget, not to the user.
The result is predictable. Urea is overused because it is far cheaper than other nutrients. Phosphatic and potassic fertilisers are covered under the Nutrient Based Subsidy scheme, but their retail prices are not frozen in the same way. The price signal, therefore, pushes farmers toward nitrogen even when soils require a more balanced nutrient mix.
India’s nutrient use has moved far away from the recommended 4:2:1 ratio for nitrogen, phosphorus and potassium. The imbalance has contributed to falling nutrient-use efficiency, soil degradation, groundwater contamination and higher nitrous oxide emissions. A subsidy meant to support production has become a source of ecological stress.
Why current subsidies favour irrigated regions
The present system also distributes public support unevenly. Farmers who use more fertiliser receive more subsidy. This favours irrigated regions growing paddy and wheat, especially Punjab, Haryana and western Uttar Pradesh. It does far less for rainfed regions growing pulses, oilseeds, millets and coarse cereals.
Large farmers gain more because they cultivate more land and use more inputs. Small and marginal farmers, who form the overwhelming majority of India’s farm households, receive less support because their cultivated area, irrigation access and input use are limited. The most vulnerable farmers are often those least served by the subsidy.
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This is the central contradiction. A farmer in a rainfed district may be poorer than a farmer in an irrigated belt, but receives less public support because he uses less fertiliser. A scheme defended in the name of farmer welfare ends up rewarding input consumption.
Direct income support through DBT
India should gradually replace product-linked subsidy with direct income support. The transfer can be calibrated by landholding, cropped area, agro-climatic vulnerability and socio-economic criteria. A higher weight can be given to smallholders, rainfed farmers and regions exposed to climate stress.
This would change the basis of support. The state would no longer subsidise the quantity of fertiliser used. It would support the farmer directly. Farmers could then choose the appropriate mix of urea, DAP, potash, biofertilisers, organic manure or other soil nutrients.
Such a shift would also reduce regional bias. Rainfed agriculture covers a large share of India’s cultivated area, but receives limited benefit from the present fertiliser subsidy structure. Direct transfers would delink support from fertiliser intensity and make public spending more equitable across crops and regions.
The infrastructure for this shift is no longer absent. Jan Dhan accounts, Aadhaar and mobile connectivity have already created the backbone for direct transfers. The present fertiliser DBT system is not a cash transfer to farmers. It releases subsidy to companies after verified sales through point-of-sale machines. The next reform must move from sale-linked payment to farmer-linked support.
MSP reform and crop diversification
The same logic applies to minimum support price procurement. MSP is announced for many crops, but effective procurement is concentrated in paddy and wheat. Farmers in states with strong procurement systems receive assured price support. Farmers growing pulses, oilseeds and coarse cereals in rainfed areas often sell below MSP because procurement is weak.
This has created another distortion. Assured procurement has encouraged paddy-wheat monocropping in northwestern India. It has also deepened groundwater stress. Public policy, in effect, pays farmers to continue a cropping pattern that is increasingly unsustainable.
Direct income support would not eliminate the need for MSP. Price support may still be needed for food security and market stabilisation. But the central instrument of farmer welfare should not be tied only to a few crops or inputs. It should give farmers the confidence to diversify into pulses, oilseeds, millets, horticulture and less water-intensive crops.
This would serve three objectives at once: income stability, nutritional security and climate resilience.
Subsidy reform must be phased
The case for reform is strong, but the transition cannot be abrupt. Raising fertiliser prices suddenly would create political and economic stress. Farmers have planned cultivation around subsidised inputs for decades. A shift to DBT must therefore be phased, predictable and accompanied by compensation.
The biggest risk is exclusion. Land records remain incomplete in several states. Tenant farmers and sharecroppers may be left out if eligibility is based only on ownership. Any serious reform must include cultivators, not just landowners. Panchayat records, crop surveys, tenancy declarations and state-level databases will have to be aligned.
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There is also a sequencing problem. The government cannot withdraw fertiliser subsidy before building credible income-support architecture. It must first identify beneficiaries, test transfer formulas, protect smallholders and ensure that local fertiliser markets remain competitive.
A practical route would be to begin with pilots in selected districts, especially in rainfed regions. The government can then move gradually toward capped input subsidy and higher direct transfers. The objective should be reform, not shock therapy.
Farmer support for a new agricultural economy
India’s farm policy still carries the imprint of the Green Revolution. That was understandable when the main concern was cereal shortage. The challenge today is different. India needs stable farm incomes, healthier soils, less water-intensive agriculture, lower import dependence and more nutritious diets.
Fertiliser subsidy and paddy-wheat procurement no longer serve these goals well enough. They protect farmers in the short run, but distort incentives in the long run. They also impose a recurring fiscal burden that rises whenever global energy or fertiliser markets turn volatile.
The better principle is simple: support the farmer, not the input. Direct income support can be made more equitable, more transparent and more compatible with climate-resilient agriculture. It will not be easy. But continuing with the present system will be costlier.
The question is no longer whether fertiliser subsidy reform is necessary. The question is whether India can redesign farm support before fiscal stress, soil damage and water scarcity force a harsher correction.
A Amarender Reddy is Joint Director, Policy Support Research, ICAR-National Institute of Biotic Stress Management, Raipur. Arun Reddy Anugu is an MS student at Carnegie Mellon University, USA.