Reforming India's Fertilizer Subsidy: Why Design Details Matter

India's fertilizer subsidy, worth nearly Rs 2 trillion in FY26, has long been a pillar of farm policy. It has helped support food production, steady the incomes of small farmers, and keep prices stable at the farm gate, which in turn underpins buffer stocks and the public distribution system that reaches hundreds of millions of beneficiaries. These are genuine gains. Yet the system has also built up distortions over time, and the government's push to move subsidies directly to farmers through Direct Benefit Transfer (DBT) makes the design of any reform a question worth examining carefully.

A central problem is the imbalance between fertilizer types. Urea, sold at a fixed Rs 242 per 45 kg bag since March 2018, absorbs nearly two-thirds of the subsidy. Cheap urea has skewed nutrient use, pushing the nitrogen-phosphorus-potassium (N:P:K) ratio to about 10.9:4.4:1 against the recommended 4:2:1, with too much nitrogen crowding out the other nutrients. Over the decades, the response of grain output to fertilizer has weakened and nutrient-use efficiency has fallen to roughly 35-40%, with soil health suffering. Bringing urea gradually under the Nutrient-Based Subsidy framework, which links support to nutrient content, is seen as the structural fix for pricing.

DBT addresses how subsidies are delivered but not the underlying price signals. If relative prices stay unchanged, farmers receiving cash will still have an incentive to overuse nitrogen, so the channel changes without changing behaviour. There are also practical hurdles. A large share of land is farmed by tenants while ownership rests with absentee landlords; survey estimates put informal tenancy at about 17.3% of operational holdings, so a transfer tied to land records could reach non-cultivators. For small farmers, a system where they buy fertilizer at market price first and receive the subsidy later raises liquidity stress at the start of the crop cycle. One survey found a clear majority of farmers preferred the existing point-of-sale linked system over direct cash transfer.

Import dependence adds price risk. In 2024-25 India produced 46.5 million tonnes of fertilizer against demand of 64.9 million tonnes, meeting the gap through imports, with a large share of urea coming from Gulf countries, much of it shipped through the Strait of Hormuz. Past global shocks have shown how quickly urea prices can spike and inflate the subsidy bill. Under a fixed cash transfer, a sudden price rise would shift the burden onto farmers rather than the state, which is a live concern when global supply routes are under strain.

For exam preparation, this editorial brings together several themes. Worth revising are the difference between urea pricing and the Nutrient-Based Subsidy scheme, the meaning of the N:P:K ratio and balanced fertilisation, Direct Benefit Transfer as a delivery mechanism, the concept of subsidy targeting and leakage, and India's import dependence for key nutrients. Aspirants should be able to argue both the benefits and the design risks of moving to farmer-facing DBT in a balanced way.