Prime Minister Narendra Modi's government has embarked on a transformative reform journey, touching sectors from income tax and GST to labour laws and free trade agreements. Even the rural employment scheme is seeing changes. The overarching goal is to maintain India's GDP growth above 7% amidst global uncertainties, including trade pressures from the US under President Donald Trump. However, one critical area remains conspicuously untouched by this wave of change: agriculture, possibly due to the political sensitivities following the repealed farm laws. The most pressing issue within this sector is the ballooning fertiliser subsidy, projected to reach a staggering Rs 2 lakh crore in the FY26 Union Budget, which totals Rs 51 lakh crore. This demands immediate and courageous policy intervention.
The Fiscal and Agronomic Crisis of Distorted Subsidies
The fertiliser subsidy is now the second-largest expenditure in the central budget, only behind food subsidy. Its allocation surpasses the entire budget of the Ministry of Agriculture and Farmers' Welfare (Rs 1.37 lakh crore for FY26). This explosive growth is driven by rising consumption and soaring input costs, exacerbated by India's heavy reliance on imports. The country imports about 78% of the natural gas for urea production, nearly 90% of phosphatic fertilisers, and all of its potash requirements. This import dependence, coupled with volatile global energy prices, makes the subsidy a fiscal and geopolitical vulnerability.
The core of the problem lies with urea. It receives nearly two-thirds of the total fertiliser subsidy and is sold at a fixed, artificially low price of Rs 242 per 45-kg bag. In contrast, other fertilisers like DAP and MOP operate under a decontrolled pricing system with a fixed nutrient-based subsidy (NBS) since 2010. This massive price distortion encourages farmers to overuse urea while under-applying phosphorus and potassium, devastating soil health. India's nutrient-use ratio (N:P:K) has skewed to an alarming 10.9:4.4:1, far from the healthy 4:2:1 ratio recommended by agronomists.
China's Lesson and India's Productivity Lag
A comparison with China reveals the cost of this imbalance. Despite having a smaller cropland area (127.6 million hectares vs India's 168.3 mha), China's agricultural output was about $1.27 trillion in 2023, double India's $0.63 trillion. China achieves this with higher fertiliser application (373 kg/ha vs India's 182 kg/ha) and a far more balanced nutrient ratio of 2.6:1.1:1. The consequences in India are stark. In Punjab, for instance, farmers use 61% more nitrogen than recommended but underuse potassium by 89%. This leads to lush-looking fields that ultimately yield lower-quality grains and plateauing productivity.
The policy design is fundamentally flawed. China provides a direct input subsidy per unit of land, allowing fertiliser prices to be market-driven. This spurs innovation, with over 60% of fertiliser consumption being complex blends, compared to a mere 17% in India. India's NBS scheme has failed to promote integrated nutrient management. The inefficiency is staggering: Nutrient Use Efficiency (NUE) is just 35-40%, meaning most fertiliser is wasted, polluting air and water. Nitrous oxide emissions from lost nitrogen are 278 times more potent than CO2, and groundwater contamination is widespread.
The Path Forward: Direct Support and Market Freedom
Reforming this regime requires political will, but the potential rewards are immense. The most effective solution is to gradually dismantle price controls and shift to equivalent direct income support for farmers. A deregulated market would encourage innovation, improve efficiency, and send correct price signals for balanced nutrient use. Promoting micronutrients and precision farming techniques like fertigation would further boost yields.
A key challenge is identifying tenant farmers who are often absent from formal records. This can be addressed by integrating various data sources—land records, PM-KISAN databases, satellite imagery, and procurement data—using AI and machine learning. A more immediate, feasible reform is to bring urea under the NBS regime, rationalising subsidies by reducing support for nitrogen while increasing it for phosphorus and potassium, without raising the overall subsidy bill.
Such reforms could unlock annual savings of around Rs 40,000 crore, funds that could be redirected to agricultural research, irrigation, and building value chains for high-value crops. With balanced nutrient use and precision farming, the same land can produce more, raising farm incomes and stimulating rural demand for goods. Given the current favourable economic conditions of high growth and low inflation, the time is ripe for Prime Minister Modi to undertake this crucial reform and secure the future of Indian agriculture.
