Reforming India’s fertilizer subsidy programme: getting the design right

Over time, the system has accumulated distortions that now call for a course correction. The flow of subsidies through distributors rather than to cultivators has raised questions of targeting. More structurally, a price imbalance across fertilizer types has quietly grown in ways that now need to be addressed.

Urea, sold at a fixed ₹242 per 45kg bag since March 2018, receives nearly two-thirds of the fertilizer subsidy. This has pushed India’s N:P:K ratio to 10.9:4.4:1, against the agronomically recommended 4:2:1, with excessive nitrogen crowding out phosphorus and potassium. The fertilizer-to-grain response ratio has declined from 1:10 in the 1970s to barely 1:2.7 today, while nutrient use efficiency stands at just 35-40%. Soil health, which is the foundation of food security, now needs attention alongside the delivery question. The next phase of reform should focus on the pricing structure by gradually bringing urea under the Nutrient-Based Subsidy framework.

The proposed shift to Direct Benefit Transfer (DBT) addresses delivery but not this underlying dynamic. Farmers receiving cash will still respond to price signals. Unless relative prices change, the incentive to overuse nitrogen will persist regardless of the transfer mechanism. The reform would change the channel without changing the behaviour it aims to shape.

Ground realities also make direct transfers more complex than they appear. Land ownership and active cultivation do not always coincide. With rising urbanization, a growing share of land is farmed by tenants while ownership remains with absentee landlords. The National Statistical Office’s (NSO) Situation Assessment Survey estimates that 17.3% of India’s 101.98 million operational holdings are under informal tenancy. A DBT system anchored to land records would transfer benefits to non-cultivators, bypassing those who actually farm. It could also make land attractive to retain as a financial asset, which is not a desirable outcome for agricultural productivity.

Liquidity is a related concern for small and marginal farmers. A farmer-facing DBT requires purchasing fertilizer at market prices first and receiving the subsidy later. This sequencing increases dependence on informal credit at the very start of the crop cycle, when financial vulnerability is highest. A NITI Aayog-commissioned survey found that 76.5% of farmers preferred the existing point-of-sale linked system, while only 36.4% supported direct cash transfer, largely for this reason.

There is also the question of how the transfer will actually be used. Cash is fungible. Farmers facing immediate financial pressures such as loan repayments, household needs and health expenses may reasonably use the transfer for those purposes rather than fertilizer purchase. This is not a failure of intent but a rational response to competing demands under financial stress. However, the effect is that the link between the subsidy and its agronomic purpose can loosen precisely when it matters most. A mechanism designed to support crop nutrition may in practice be diverted toward other immediate needs leaving farmers dependent on whatever inputs they can purchase through informal credit.

Price risk adds further urgency when set against India’s import dependence. In 2024-25, India produced 46.5 million tonnes of fertilizer against the demand of 64.9 million tonnes. The 18.5-million-tonne gap was met through imports, with approximately 70% of urea coming from Gulf countries. Nearly 60% of diammonium phosphate (DAP) is imported, Saudi Arabia alone accounts for over 40%, and India has no domestic potash reserves. Much of this trade moves through the Strait of Hormuz, which is now under strain. In 2022, when Russia invaded Ukraine, urea prices rose from $270 to $925 per tonne and India's subsidy bill nearly doubled as the state absorbed the shock. Under a full DBT system, a fixed transfer meets a moving price and the burden shifts to farmers. With urea currently at $540 to $675 per tonne, that is not a theoretical concern. It is the question of this season.

A more effective path forward requires three things to move together. If DBT is to be pursued, then transfers must come before purchase so that liquidity constraints are eased, and this will require strategic positioning of the fiscal plans that the government has so far avoided. Targeting must evolve beyond land ownership to capture actual cultivators, using local validation and satellite-based crop monitoring. Most critically, the pricing structure must be corrected by bringing urea gradually under the Nutrient-Based Subsidy framework. Without aligning relative prices, no transfer mechanism can deliver balanced fertilization.

India built its fertilizer subsidy system to protect farmers from global price shocks like the one now emerging from the Strait of Hormuz. The system became disrupted, and fiscally unsustainable. But the solution is not a vulnerable farmer, but a better-designed one. If India removes price protection before building liquidity support and proper tenant identification and correcting prices under the NBS framework then the point of failure will shift closer to the ground. The risk will move from the factory gate to the small farmer’s field. That is not reform. That is redistribution of risk downward, to those who can least afford to absorb it.

Vidya Vemireddy is a faculty member at the Centre for Management in Agriculture at the Indian Institute of Management, Ahmedabad (IIMA). The views expressed here are personal and do not represent the view of the institution.

Gowrikrishna M., a research assistant at IIMA, contributed research for this article.