Why India’s Fertiliser Subsidy Bill Is Unsustainable

But these subsidies have not incentivised the industry to make production more efficient, or encouraged greater private investment in the sector. Cheap chemical fertilisers also harm soil health and work against India’s aims for natural farming. In addition, India’s fertiliser subsidy is highly dependent on imports and global prices, thus raising the fertiliser bill without a proportional increase in fertiliser use.

Experts say India’s fertiliser subsidy has hidden costs and needs more transparent accounting. India also needs to move away from an industry-focused fertiliser subsidy to one paid directly to farmers, and in conjunction with efforts to improve soil health and the use of organic fertilisers.

Why India subsidises fertilisers

The Standing Committee on Agriculture’s Report ‘Impact of chemical fertilisers and pesticides on agriculture and allied sectors in the country’ noted that 45 million tonnes of fertilisers are required to produce at least 300 million tonnes of foodgrains by 2025. About 82% of this requirement would be met by subsidised chemical fertilisers. Fertiliser subsidies have, therefore, been an integral component of government expenditure towards the agriculture sector, and are aimed at ensuring adequate availability of affordable fertilisers for all farmers. Because of this, they are considered integral to India’s food security.

These subsidies also seek to minimise farmers’ risk associated with the international price volatility of fertilisers as well as raw materials used in their production. Currently, subsidies are offered only for chemical fertilisers, excluding liquid, bio-fertilisers, and organic manure.

The government subsidises fertilisers through two schemes–Urea subsidy, and Nutrient-Based Subsidy (NBS) for phosphate and potash (P&K) fertilisers. Both subsidies are producer-based, that is, the government directly provides them to manufacturers/importers of fertilisers. The distribution and movement of fertilisers from manufacturing plants to all regions of the country are monitored by the government’s Department of Fertilisers.

NBS establishes a fixed per-tonne subsidy amount for P&K fertilisers depending on their nutrient content, revised annually, based on which the government decides the Maximum Retail Price (MRP) of the fertilisers. Until January 2024, firms were free to determine “reasonable MRPs” based on demand and supply, after which the government mandated the capping of profit margins and MRPs.

Urea fertilisers, both indigenous and imported, are sold at a statutorily notified MRP of Rs 242 per 45 kg bag pan-India, and are thus categorised as controlled fertilisers.

Spending on fertilisers highly dependent on imports

In 2008-09, fertiliser subsidies shot up, as global prices soared, but domestic prices remained unchanged. Between 2010 and 2020, fertiliser subsidy expenditure stabilised. In 2019-20, the government spent just over Rs 80,000 crores on fertiliser subsidies. Expenditure has consistently increased since then–in 2021 due to supply disruption as a result of China’s export restrictions and global sanctions on Russia and Belarus, and then in 2023 due to skyrocketing global prices in the wake of the Russia-Ukraine war.

The subsidy bill fell to less than Rs 190,000 crore in FY24 due to global price falls, reduced urea imports, and stable retail prices. The government has made efforts to finalise long-term supply and price agreements with suppliers of fertilisers and raw materials, and widely promote organic and nano variants of fertilisers. Nano variants release soil nutrients in a controlled manner and are considered more efficient for nutrient diffusion than chemical fertilisers.

Between 2017-18 and 2021-22, total consumption of fertilisers increased by only 16.2% even as the subsidy expenditure shot up by 131.3%. This is because the consumption increase is met mostly with imports, at steep prices. India’s import dependency on raw materials like natural gas, potash, and phosphate is as high as 100%, 90%, and 60%, respectively, and their prices are critical determinants of the cost of manufacturing fertilisers domestically.

The Comptroller and Auditor General (CAG) estimated that over 90% of the subsidy payment increase between 2004-09 was due to the international prices of fertilisers. Such import dependence makes India vulnerable to global uncertainties, risking the fiscal sustainability of fertiliser subsidies.

Opaque subsidies, hidden costs

The government also often delays the payment of subsidy amounts to manufacturers/importers. Deferred payments carried over year after year by the government resulted in accumulated dues of Rs 43,483 crore by the end of FY19. The CAG observed that the revised estimate for FY21 (Rs 133,947 crore) made provisions for clearing the carry forward liability in that year.

The government has also previously issued special securities to fertiliser companies in place of cash subsidies, deferring the payment of the bond principal, while paying interest.

Additionally, the government bears the interest payable on Special Banking Arrangement (SBA) loans arranged for fertiliser producers from Public Sector Banks against unpaid subsidy bills. The CAG said that information on SBAs advanced for meeting fertiliser producers’ claims has not been furnished for audit, and possibly comprises EBRs.

This is one instance of “subsidy opacity”, said Anoop Singh, a member of the fifteenth finance commission, who has written about this in his recent paper Bridging the Data Gaps in India: The Case of Subsidy Spending.

Overall, fertiliser subsidies are estimated to be so costly that they far outstrip the benefits of agricultural productivity.

Limited private investment and installed capacity

The NBS policy envisioned a competitive market for P&K fertilisers that would ensure prices remained favourable for farmers and spur innovations to meet farmers’ needs. However, NBS has led to a marginal decline in domestic production and installed capacity has remained stagnant. The CAG in 2015 observed that both private and public investments towards increasing fertiliser plant numbers and their installed capacity have been insufficient.

In January 2024, as we said, the government capped the profit margins of subsidised P&K fertilisers and mandated its MRP not to exceed 8-12% of the sales cost. Such indirect monitoring and price controls could be a further disincentive for the private sector from entering the market.

Urea manufacturers profitability has also consistently declined, while their installed capacity has not grown much. Their production costs have increased due to rising prices of natural gas. The government has been forced to revive old manufacturing plants at steep costs to meet increasing demand, due to the lukewarm response of the private industry in the past 25 years.

Low production efficiency

Ashok Gulati and Pritha Banerjee in their paper Rejuvenating Indian Fertiliser Sector question whether it is rational for public sector plants to produce fertilisers at steep costs when they can be imported at similar costs. For example, the production costs of indigenous urea manufacturers are estimated to be higher than urea’s import parity price in India. In fact, the urea industry’s profitability as a percentage of its net worth is negative, the paper says.

The Standing Committee on Chemicals and Fertilisers explain in a 2020 report that because manufacturers receive subsidies depending on their cost of production, the government pays high subsidy amounts to inefficient and globally uncompetitive firms with higher production costs. Firms, therefore, have no incentives to replace old technology and processes, which could improve productivity and reduce production costs.

Choked policy on organic fertilisers, diversion of fertilisers for non-farm use

The government does not subsidise environment-friendly fertilisers such as liquid and biofertilisers, and organic manure. The government introduced the Policy on Promotion of Organic Fertilisers only in 2023-24, and its 2025-26 budget allocation (Rs 150 crore) is small in comparison to fertiliser subsidies. The revised estimate of 2024-25 was Rs 45 crore against a budgeted Rs 100 crore. Additionally, skewed emphasis on primary nutrients has made the soil deficient in secondary macro and micronutrients.

The Ministry of Chemicals and Fertilisers and the Ministry of Agriculture work with incongruent objectives and mandates, highlights Amar Patnaik, former Member of Parliament and member of various Standing Committees on Finance, in an opinion piece for Livemint. The fertiliser ministry aims to increase the usage of conventional fertilisers while on the other hand, the agriculture ministry promotes organic alternatives.

Chemical fertilisers, supported by fertiliser subsidies, have had implicit and unaccounted costs to the environment, such as soil damage, water and air pollution, and negative biodiversity and health effects due to overuse.

The government also often highlights the diversion of agricultural-grade urea for non-agricultural purposes and their transfer across the border illegally, as consumer prices of fertilisers in India are far below those of neighbouring countries.

Way ahead

The 2009 budget speech had envisioned moving towards direct subsidy payments to farmers. The Standing Committee on Chemicals and Fertilisers in 2020 again recommended moving towards direct subsidy payments to farmers on a per-unit basis. But the government says that it is not administratively feasible to disburse per-unit subsidy directly to farmers, as that would require disbursement depending on the quantity and type of product purchased. Moreover, price controls would then have to be lifted, and market forces and producer considerations would determine prices in different states, raising equity concerns.

In August 2015, Gulati and Banerjee in Rationalising Fertiliser Subsidy in India: Key Issues and Policy Options explain that if farmers receive the subsidy on a per-hectare basis directly into their bank accounts, they would be free to choose whichever kind of fertiliser they prefer. Such direct cash transfers to farmers can be linked with the take-up of soil health care programs. This will also correct the misalignment between the government’s push for Zero Budget Natural Farming, and its subsidisation of chemical fertilisers, they wrote in another piece in December 2019.

They compare India’s performance to China’s. Between 2000 to 2012, China’s domestic production of nitrogenous fertilisers increased and it became a net exporter. India remained a net importer during the same time. China’s fertiliser consumption per hectare and its cereal production surpassed that of India by more than double, Gulati and Banerjee wrote in 2015. They credit this to China’s move from fertiliser subsidies to direct cash transfers to farmers.

The government reportedly says that the commercial rollout of indigenously manufactured nano fertilisers, which are priced at half the cost of conventional fertilisers to consumers, are more effective in terms of farm productivity, will increase output and reduce production costs, imports, and subsidy bills.

In June 2023, the government also approved the PM Programme for Restoration, Awareness Generation, Nourishment, and Amelioration of Mother-Earth (PM-PRANAM) under which 50% of fertiliser subsidies saved by a state or union territory (UT) by reducing use of chemical fertilisers (Urea, DAP, NPK, MOP) compared to average consumption in the last three years, would be passed on to the state or UT as a grant.

We have reached out to Rajat Kumat Mishra, the secretary of the Department of Fertilisers for comment on all the issues raised with the fertiliser subsidy in this story. We will update this story when we receive a response.

Singh says there is a need for fiscal discipline to include the hidden costs of fertilisers. He asserts “without overdue reforms, fiscal inefficiencies will persist, effectively limiting the government’s ability to fund critical investments in health, education, and infrastructure. By adopting standardised, tech-enabled, and internationally accepted reporting mechanisms, India can build a more transparent subsidy system and strengthen its fiscal governance and global credibility”.

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