India’s fertiliser subsidy bill has crossed INR 1.7 trillion (USD 18.5 billion) for the financial year 2027. Analysts say the system funding it is both financially unsustainable and environmentally damaging.
The subsidy, designed to keep fertiliser affordable for farmers, has grown into one of the Indian government’s largest recurring expenditures. Urea alone accounts for the biggest share, with the government budgeting INR 1.17 trillion (USD 12.7 billion) for it this year. The urea subsidy has exceeded INR 1 trillion every year for the past six years.
Purva Jain, Lead Energy Specialist, Gas & International Advocacy at IEEFA (Institute for Energy Economics and Financial Analysis), argues in a new factsheet that the system needs urgent reform. “There is an urgent need to recalibrate the subsidy outgo not only to address economic concerns but also to improve health, agriculture efficiency and long-term environmental outcomes,” Jain writes.
How the Subsidy System Works
The government fixes the retail price of urea well below market rates and pays fertiliser companies the difference. A separate direct benefit transfer (DBT) scheme releases 100% of the subsidy on non-urea fertilisers directly to companies, based on verified sales tracked through Aadhaar-linked point-of-sale devices installed at retail outlets.
Despite a steady rise in DBT allocations, from under INR 10 crore until FY2024 to INR 32 crore in FY2026 — no budgetary allocation has been made for this component in FY2026, raising questions about the government’s commitment to the reform path.
To reduce urea imports, the government commissioned six new domestic urea plants over the past six years. Domestic production reached its highest level in FY2023–24. But this push for self-sufficiency quietly created a new dependency.
India’s new urea plants run primarily on natural gas. Because affordable domestic gas is limited and is prioritised for city distribution and industrial use, fertiliser plants have turned to imported liquefied natural gas (LNG). LNG now powers approximately 86% of domestic urea production.
The cost of importing urea has effectively been replaced by the cost of importing the gas to make it. Jain argues this has created a hidden dependency — replacing one form of import reliance with another that is arguably more volatile and fiscally risky. This dependence on LNG also adds to India’s import bill and widens the current account deficit, placing the subsidy’s fiscal risk beyond domestic control.
Why the Cost Keeps Rising
The gap between domestic gas prices and international LNG spot prices is significant, and grows more unpredictable as global crude oil prices shift, since India’s domestic gas price is now linked to the Indian crude basket.
The difference between the notified domestic price and the ceiling price was less than one dollar in the last fiscal year. Analysts warn this gap could widen sharply with changing global dynamics, triggering even higher subsidy outgoes that the government would have little control over.
Why Soil Health Is Deteriorating
The subsidy structure has pushed farmers toward urea, which is the cheapest and most heavily subsidised fertiliser. This has distorted how farmers use nutrients, and the soil is paying the price.
The Economic Survey 2026 found that India’s nitrogen-to-phosphorus-to-potassium (N:P:K) ratio, a key measure of balanced soil nutrition, stood at 4:3.2:1 in FY2010, close to recommended levels. By FY2020, it had deteriorated to 7:2.8:1. By FY2024, it had worsened further to 10.9:4.1:1.68. An imbalanced ratio signals declining soil health and falling crop productivity over time.
A nutrient-based subsidy for phosphatic and potassic fertilisers has been in place for over a decade, designed to reduce dependence on urea. Despite this, total fertiliser subsidy outgo has remained above INR 1.5 trillion annually for five consecutive years.
Why Reform Cannot Wait
The Economic Survey recommends a targeted fix: slightly raise the retail price of urea and transfer an equivalent amount directly to farmers on a per-acre basis. This would preserve farmers’ purchasing power while making nitrogen fertiliser marginally more expensive relative to its true agronomic cost, nudging farmers toward more balanced fertiliser use.
The IEEFA factsheet backs this direction, calling on policymakers to restructure the subsidy system as the most immediate and practical path to reducing both fiscal pressure and environmental damage.
Without reform, analysts warn, India risks locking itself into a cycle of rising costs, degraded farmland, and growing dependence on the very global commodity markets the subsidy was designed to escape.
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