Fertilizer Reform, Strike While the Prices Are Hot
As Urea and Gas Prices Surge Amid the West Asia War, the Fiscal Burden of India’s Outdated Subsidy Regime Demands Action—and the Benefits Extend Beyond Budget Savings
On January 7, this publication made a case for reforming India’s highly inefficient regime of fertilizer production, pricing and distribution, and for switching over from product subsidization to income support for farmers. This imperative has since been sprung centre-stage by a war in West Asia that has disrupted our imports of urea and its feedstock gas, both of which form large shares of domestic usage and have seen global prices flare up. The fiscal burden that this imposes on the government should be enough to trigger action.
The longer we retain the status quo, the worse this war’s likely impact will be through inflated import bills, which look poised to enlarge rapidly if peace proves elusive. In general, India privileges the fertilizer industry for allocations of natural gas, but right now, its allotment has been slashed by 30 per cent, while prices have been held firm, as the Centre prioritizes piped natural gas supply to homes for cooking and the compressed kind used by vehicles as a fuel. This is a temporary measure in response to an emergency, but it reveals the fragility of a system that depends on uninterrupted gas supplies to produce urea at affordable prices.
The Energy-Fertilizer Nexus
In recent times, half of India’s natural gas requirement has been met by shipments, the bulk of them from Qatar in its liquefied form. Our reliance on this Gulf state for LNG has dropped from above 80 per cent to below 50 per cent over the years as we diversified our sources to include the United States, the United Arab Emirates, Oman, Australia and Mozambique. Diversification has reduced vulnerability, but it has not eliminated it. The Strait of Hormuz remains a chokepoint that a significant portion of global LNG supplies must pass through.
However, Iran’s clamp on the Strait of Hormuz—or attempt to play gatekeeper—has cut off LNG supplies to big buyers like Japan, South Korea and Taiwan, which are now in a scramble for options that has pushed up LNG prices in the global spot market. Even for those with contracts, pricing is typically linked to oil price indices such as the Japanese Crude Cocktail, and when oil gets dearer, so do these contracted supplies.
Should India cling to its outdated fertilizer subsidy regime, the public money needed to fund it would bloat. Even if Hormuz opens up to pre-war levels of traffic and production resumes at the LNG plants in the Gulf that have been shut down, the ripple effect of this supply shock could keep the dollar price of gas high and the rupee weak, making it that much harder for the government to keep its spending in check.
The numbers are stark. India’s urea consumption is about 40 million tonnes annually, with domestic production stagnating at around 30 million tonnes. The gap is met by imports, and over 60 per cent of those imports come from the Persian Gulf region. Natural gas, the key feedstock for urea, is largely imported, supplying about 85 per cent of the gas used in domestic production. Once both direct urea imports and imported gas feedstocks are considered, India’s effective import dependence in urea goes up to about 55 per cent.
When global prices rise, every percentage point of import dependence translates into additional fiscal burden. The current crisis has already pushed urea prices from about $484 per tonne to $652 per tonne—a 35 per cent jump. If this persists, the subsidy bill could balloon beyond the budgeted ₹1.7 lakh crore, potentially crossing ₹2 lakh crore.
The Case for Reform
Fertilizer reform would both ease pressure on the fisc and raise the efficiency of India’s crop production. Heavily subsidized urea releases nitrous oxide into the air, a global warming gas, and pollutes the ground water with nitrates. The environmental damage is real and growing.
To boost farm output, we need a judicious mix of fertilizers. While the ideal proportion of nitrogenous, phosphatic and potassic fertilizers is 4:2:1, a long-running subsidy skew in favour of nitrogen has resulted in an N:P:K farm ratio of 10.9:4.4:1. This depresses nutrient conversion into grain by plants and partly explains why our agricultural value addition per unit of crop area is only 38 per cent of China’s.
The distortion is not accidental; it is the direct result of policy choices. Urea is subsidized more heavily than other fertilizers, and the subsidy is administered at the point of production or import, not at the point of consumption. This creates a cascade of distortions.
First, it encourages overuse of nitrogen. Farmers, seeing urea cheaper than its true cost, apply more than crops can absorb. The excess nitrogen does not increase yields; it runs off into water bodies or escapes into the atmosphere. The result is wasted money and environmental damage.
Second, it discourages use of other nutrients. Phosphorus and potassium are essential for balanced plant growth, but they are relatively more expensive than urea. Farmers skimp on them, reducing yields and degrading soil health over time.
Third, it creates opportunities for diversion and smuggling. Urea that is meant for Indian farmers finds its way across borders or into industrial uses, exploiting the price differential between subsidized and market rates.
Fourth, it places an unsustainable burden on the fiscal. The fertilizer subsidy is one of the largest items in the government’s budget, consuming resources that could be used for other priorities.
The Alternative: Direct Income Support
To secure a mix of fertilizer types that is optimal for crop output, India should rid fertilizer prices of their subsidy. An artificial incentive to use a specific fertilizer over others only distorts market choices and masks demand patterns that would otherwise reflect what farmers deem best for their farms.
The money saved by putting an end to a distortive subsidy regime could be sent to individual farmers as income support in proportion to the area they cultivate, so that cultivators have no reason to complain. This is not a theoretical possibility; it has been tried successfully in other countries and in some Indian states.
The logic is straightforward. Instead of subsidizing the price of urea, the government could transfer cash directly to farmers’ bank accounts. Farmers would then buy fertilizer at market prices, choosing the mix that best suits their soil and crops. The subsidy would be transparent, predictable, and easy to administer.
The benefits would be multiple. First, the fiscal burden would be capped. Instead of an open-ended commitment that varies with global prices, the government would know exactly how much it is spending each year.
Second, farmers would have an incentive to use fertilizer efficiently. When they pay market prices, they will apply only what is needed, reducing waste and environmental damage.
Third, the fertilizer industry would face real market signals. Producers would have to compete on price and quality, rather than relying on subsidies to keep them afloat.
Fourth, the distortions in fertilizer use would be eliminated. Farmers would choose the mix of nutrients that maximizes their yields, rather than the mix that is most heavily subsidized.
Overcoming Objections
The objections to fertilizer reform are predictable. Farmers will protest, fearing that they will pay more. The fertilizer industry will resist, fearing that it will lose its protected market. Politicians will worry about electoral consequences.
But these objections can be addressed. First, farmers should not pay more if the subsidy is transferred to them directly. They will have the same amount of money; they will simply spend it differently. For small farmers who use less fertilizer, they may even end up better off.
Second, the transition can be phased. A gradual reduction in subsidies, accompanied by a gradual increase in direct transfers, would allow farmers and industry to adjust.
Third, the environmental and fiscal benefits are too large to ignore. The current system is unsustainable; the only question is whether reform will be forced by crisis or chosen by design.
The Opportunity Now
The current crisis presents an opportunity. Fertilizer prices are rising, import bills are swelling, and the fiscal burden is mounting. The government cannot control global prices, but it can control how it responds to them.
There is no better time to act than now. When prices are rising, the cost of maintaining the subsidy is highest, and the case for reform is strongest. Farmers understand that the government cannot insulate them from global markets forever; they may be more receptive to alternatives when they see the pressure on the budget.
A cost-benefit analysis rarely makes such a robust case for reform. The environmental benefits, the fiscal benefits, the efficiency benefits—all point in the same direction. The only question is whether the government will seize the moment.
Conclusion: A Window of Opportunity
The West Asia war has exposed the vulnerabilities of India’s fertilizer system. Dependence on imports, concentration of supply in a volatile region, and an outdated subsidy regime have combined to create a perfect storm. But every crisis is also an opportunity.
Reforming the fertilizer subsidy is not just about saving money. It is about making Indian agriculture more efficient, more sustainable, and more resilient. It is about giving farmers the freedom to choose what is best for their farms. It is about protecting the environment from the excesses of over-fertilization. It is about using public money more wisely.
The window of opportunity is open. Global prices are high, the fiscal pressure is intense, and the need for reform is clear. Whether the government will act—or whether it will wait for the crisis to pass and return to business as usual—remains to be seen.
But the case for reform has never been stronger. And the cost of inaction has never been higher.
Q&A: Unpacking India’s Fertilizer Subsidy Challenge
Q1: How has the West Asia war affected India’s fertilizer supply chain?
A: The war has disrupted both direct urea imports and the natural gas feedstock for domestic production. India imports about 60 per cent of its urea, with over 60 per cent of those imports coming from the Persian Gulf region. Natural gas, which supplies about 85 per cent of the feedstock for domestic urea production, is also largely imported. The closure of the Strait of Hormuz has choked supplies and pushed up global prices. Urea prices have jumped from $484 to $652 per tonne—a 35 per cent increase—while domestic gas allocation to fertilizer plants has been cut by 30 per cent.
Q2: What is the fiscal impact of rising fertilizer prices on India’s budget?
A: The fertilizer subsidy is one of the largest items in the Union Budget. The current crisis could push the subsidy bill from the budgeted ₹1.7 lakh crore to over ₹2 lakh crore. This is not a small adjustment; it represents a significant drain on fiscal resources that could have been used for other priorities like infrastructure, education, or health. The cost is driven by both higher import prices and increased domestic production costs due to pricier gas.
Q3: How does the current fertilizer subsidy regime distort agricultural practices?
A: The regime heavily subsidizes urea (nitrogen) while providing less support for phosphatic and potassic fertilizers. The ideal nutrient ratio for balanced crop growth is 4:2:1 (N:P:K), but the subsidy skew has created a farm ratio of 10.9:4.4:1—a massive overuse of nitrogen. This reduces nutrient conversion efficiency, wastes money, and causes environmental damage (nitrous oxide emissions and nitrate pollution of groundwater). It also partly explains why India’s agricultural value addition per unit of crop area is only 38 per cent of China’s.
Q4: What alternative to product subsidization is proposed?
A: The proposed alternative is direct income support to farmers, replacing product subsidies. Instead of subsidizing the price of urea (or other fertilizers), the government would transfer cash directly to farmers’ bank accounts in proportion to the area they cultivate. Farmers would then buy fertilizer at market prices, choosing the mix that best suits their soil and crops. This approach would cap the fiscal burden, give farmers incentives for efficient use, eliminate distortions in nutrient application, and expose the fertilizer industry to real market signals.
Q5: Why is now considered the right time to implement fertilizer reform?
A: The current crisis creates a window of opportunity. Global fertilizer and gas prices are high, putting immense pressure on the subsidy bill. Farmers understand that the government cannot insulate them from global markets forever, making them more receptive to alternatives. When prices are rising, the cost of maintaining the status quo is highest, and the case for reform is strongest. Waiting for prices to fall would reduce the pressure for change, allowing the inefficient system to persist. As the article states, “there’s no better time to act than now.”
