The Reform Express at a Crossroads, The Urgent Case for Rationalising India’s Food and Fertiliser Subsidies

The Reform Express at a Crossroads, The Urgent Case for Rationalising India’s Food and Fertiliser Subsidies

As the Indian economy projects a robust growth of 7.4% for FY26, buoyed by a series of reforms in taxation, trade, and fiscal management, Prime Minister Narendra Modi’s declaration of a “Reform Express” mode appears substantiated by macro-economic indicators. However, beneath this veneer of stability and growth lies a critical, creaking subsystem that threatens long-term sustainability and equitable development: the nation’s colossal and increasingly irrational regime of food and fertiliser subsidies. With the food subsidy bill likely touching ₹2.25 trillion and fertiliser subsidy nearing ₹2 trillion—together constituting a staggering 8-8.5% of the Union Budget—these programmes operate at a sub-optimal level, distorting agriculture, straining fiscal resources, and failing to evolve with a changing India. The current moment of relative macroeconomic strength and political capital presents a historic, if politically daunting, opportunity to pivot these subsidies from blanket dole-outs to targeted, efficient, and transformative instruments of policy.

The Paradox of Plenty: Subsidies Creating Agricultural Distortions

The fundamental critique of India’s current subsidy architecture is that it creates perverse incentives that are economically and ecologically damaging. The system is heavily skewed in favour of water-guzzling and fertiliser-intensive crops—primarily rice, wheat, and sugarcane. This bias is not a market outcome but a direct result of policy:

1. Open-Ended Procurement: The government, primarily through the Food Corporation of India (FCI), commits to purchasing virtually all the rice and wheat offered at the Minimum Support Price (MSP) in certain states. This guarantees a risk-free market for these crops, irrespective of national need or storage capacity.

2. Input Subsidies: Coupled with this is the provision of highly subsidised, and often free, electricity for irrigation and massively underpriced fertilisers, especially urea. A bag of urea, for instance, costs a fraction of its true economic price, encouraging its overuse.

The consequences are severe and multi-layered:

• Ecological Crisis: This policy triad has led to the catastrophic depletion of groundwater in the breadbasket states of Punjab and Haryana. It has also caused severe nutrient imbalance in soil (due to excessive urea use over potassic and phosphatic fertilisers) and increased greenhouse gas emissions from flooded paddy fields.

• Crop Imbalance & Price Collapse: Farmers have little incentive to diversify into pulses, oilseeds, or millets. The result is periodic gluts in cereals and scarcities in other essential food items. The current data is telling: while overall inflation is low at 1.3%, this is driven by a collapse in the prices of onions (-48%), potatoes (-35%), and pulses (selling 10-30% below MSP). Farmers growing these non-subsidised crops face ruin without equivalent safety nets, undermining the goal of atmanirbharta (self-sufficiency) in pulses and oils.

• Fiscal Drain: The subsidy bill is not just large; it is increasingly inefficient. A significant portion—estimated at 20-25% in the case of fertilisers—is lost to leakage and diversion to non-agricultural uses or even across borders. The economic cost of food procurement and distribution far exceeds the nutritional or economic value derived.

The Food Subsidy Conundrum: From Safety Net to Political Entitlement

The Public Distribution System (PDS), underpinned by the National Food Security Act (NFSA), 2013, is arguably the world’s largest food security programme. The Modi government’s integration of Point of Sale (POS) machines in over 500,000 Fair Price Shops was a crucial reform that significantly reduced pilferage and ensured benefits reached intended beneficiaries. However, the programme’s fundamental design logic is now ripe for scrutiny.

The core question, as posed by critics, is one of rationale and targeting. The PM Garib Kalyan Anna Yojana provides 5 kg of free rice or wheat monthly to approximately 813 million people—roughly 56% of India’s population. This coverage is based on 2011 census data and outdated socio-economic criteria. Contrast this with the World Bank’s estimate of extreme poverty in India at about 21%. This gap between coverage and need suggests the programme has morphed from a targeted safety net for the destitute into a broad-based political entitlement.

The irrationalities are stark:

• The Rice-Grower’s Paradox: A rice farmer in Punjab sells his paddy to the FCI at the MSP. The FCI then processes, stores, and transports it at great cost, only to provide a portion of it back to the same farmer (or others) as free rice under the PDS. The taxpayer effectively subsidises the cycle multiple times over.

• Nutritional Blindness: The PDS focuses almost exclusively on providing calories through rice and wheat, contributing to a hidden hunger crisis of micronutrient deficiencies (of proteins, vitamins, and minerals). This does little to address India’s dual burden of malnutrition—undernutrition and obesity.

The Path to Rationalisation:

1. Gradual Targeting: The government must muster the political will to gradually scale down coverage from 56% to a more realistic figure aligned with actual poverty metrics, perhaps phasing through 40%, then 25%, and finally to around 15% representing the “core poor” (antyodaya).

2. Direct Benefit Transfer (DBT): If wholesale reduction is politically untenable, a shift to direct cash transfers for food subsidies is imperative. Transferring the equivalent economic cost (or a portion thereof) directly to the bank accounts of eligible beneficiaries would empower them with choice, break the FCI’s monopoly, reduce the massive costs of physical handling and storage, and allow the market to respond to diversified demand.

3. Nutritional Transformation: Convert a substantial percentage of Fair Price Shops into “Nutrition Hubs” stocking pulses, millets, eggs, edible oils, and even fortified products. Beneficiaries could be provided with cash vouchers or a balanced “food wallet” to purchase a more diverse basket, fighting malnutrition more effectively.

The Fertiliser Subsidy Quagmire: Poisoning the Land and the Treasury

The fertiliser subsidy, particularly for urea, is perhaps the most distortionary of all. Priced at a fraction of its production cost, urea is overused and misused. The ideal Nitrogen (N), Phosphorous (P), and Potassium (K) ratio for Indian soil is recommended at 4:2:1, but the actual use is skewed heavily towards 10:3:1 or worse. This imbalance:

• Degrades Soil Health: Reduces long-term fertility and makes crops more susceptible to pests.

• Pollutes Water: Leads to nitrate contamination of groundwater, a severe public health hazard.

• Wastes Resources: Diverts scarce natural gas (the feedstock for urea) and foreign exchange.

• Fuels Leakage: Cheap urea is illegally diverted to industry (as a cheap source of nitrogen), smuggled to neighbouring countries, or even used in improvised explosives.

The Road to Fertiliser Reform:

1. Direct Cash Transfer to Farmers: The most effective solution is to dismantle the subsidy on the product and replace it with a fixed, per-hectare cash transfer directly to farmers’ accounts. This would allow the market price of fertilisers to reflect their true cost, encouraging balanced use. The farmer, with cash in hand, can choose fertilisers based on soil health card recommendations.

2. Immediate Interim Measures: If a full shift is too drastic, the government must at least:

   • Bring Urea under the Nutrient-Based Subsidy (NBS) regime: Currently, only P (DAP) and K (MOP) fertilisers are under NBS, where a fixed subsidy is given per nutrient. Extending this to urea would reduce the price distortion between N, P, and K, nudging farmers towards a balanced mix.

   • Shift Administrative Control: Move the fertiliser subsidy from the Department of Fertilizers (which has a producer-centric view) to the Ministry of Agriculture and Farmers’ Welfare (MoAFW), aligning it with farmer welfare and sustainable agricultural practices.

The Grand Bargain: Merging Subsidies with PM-KISAN

A visionary reform, as suggested, would be to merge the rationalised food and fertiliser subsidies with the existing Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme. PM-KISAN currently provides an unconditional cash transfer of ₹6,000 per year to all land-holding farmer families. This could be augmented and transformed:

• Create an “Agricultural Support and Nutrition Security” Direct Transfer: Consolidate the savings from a rationalised, targeted food subsidy and a reformed fertiliser subsidy into a larger, direct annual cash transfer to identified beneficiary households—both poor consumers (for food security) and farmers (for input support).

• Conditionalities for Sustainability: A portion of this transfer could be made conditional on positive environmental actions, such as crop diversification away from water-intensive crops, adopting micro-irrigation, or soil-test-based fertiliser use.

The Political Economy of Reform: Courage Versus Populism

The rationale for reform is economically irrefutable. However, the “Reform Express” faces its toughest test here, navigating the treacherous terrain of political economy. Food and fertiliser subsidies are deeply entrenched in the social contract. They are perceived as entitlements by a vast section of the population and as tools of political patronage by parties.

The government’s approach must be one of principled pragmatism:

1. Clear Communication: Build a public narrative around the ecological crisis (vanishing water, sick soil) and the fiscal need to reallocate resources towards healthcare, education, and infrastructure.

2. Phased Implementation: Avoid shock therapy. A 10-15 year roadmap with clear, incremental milestones (e.g., reducing PDS coverage by 5% every two years, increasing urea price by 10% annually alongside a compensating cash transfer) would allow for adjustment.

3. Demonstrate Benefits: Pilot the conversion of FPS to Nutrition Hubs and DBT for fertilisers in select districts to create success stories and build trust.

4. Build State Consensus: Since agriculture is a state subject, the Centre must work collaboratively with state governments, offering them incentives to participate in and co-design these reforms.

Conclusion: A Test of True Reformist Zeal

India’s subsidy regime was born in an era of scarcity, designed to achieve food security and support a nascent green revolution. Today, the nation faces a different set of challenges: surplus management, ecological sustainability, nutritional security, and fiscal efficiency. The current system is ill-equipped to meet these 21st-century goals.

Rationalising food and fertiliser subsidies is not about withdrawing the state’s support for the poor or the farmer. It is about making that support more effective, efficient, and equitable. It is about replacing a leaky, distortionary, and ecologically destructive system with one that empowers individuals, corrects market failures, and safeguards natural resources for future generations. For the “Reform Express” to complete its journey and deliver sustainable, inclusive growth, this is the most critical station it must courageously pull into. The choice is between the politically easy path of perpetuating a costly revdi (freebie) culture and the statesmanlike path of building a resilient, productive, and sustainable agri-food economy. India’s future food and fiscal security depend on this choice.

Q&A

1. What are the key agricultural distortions caused by the current food and fertiliser subsidy system in India?

The subsidy system creates severe distortions by incentivising a monoculture of water-intensive and fertiliser-heavy crops (rice, wheat, sugarcane) through a triad of policies:

• Open-Ended Procurement: Guaranteed purchase at MSP for rice/wheat.

• Highly Subsidised Inputs: Cheap/free electricity for irrigation and heavily subsidised urea.
  This leads to: Ecological damage (groundwater depletion in Punjab/Haryana, soil nutrient imbalance, increased GHG emissions); Crop Imbalance (glut in cereals, scarcity in pulses/oilseeds, price collapse for non-MSP crops); and Fiscal Inefficiency (massive subsidy bills with significant leakage). It locks farmers into an unsustainable cycle and undermines diversification goals like atmanirbharta in pulses.

2. Why is providing free food grains to 56% of the population considered economically irrational, according to the analysis?

The irrationality stems from a massive mismatch between programme coverage and actual need. The National Food Security Act covers approximately 56% of India’s population (813 million people) with free rice/wheat. However, contemporary estimates of extreme poverty (e.g., World Bank criteria) place India’s poverty rate at around 21%. This means a large number of non-poor individuals are receiving free food, transforming the programme from a targeted safety net into a broad-based political entitlement. It is fiscally wasteful, creates perverse incentives (like the rice-grower paradox), and fails to focus resources on the truly destitute.

3. What are the proposed reforms for the Public Distribution System (PDS) to make it more efficient and nutrition-focused?

The proposed reforms are threefold:

• Better Targeting: Gradually scale down coverage from 56% to a figure closer to the actual poverty headcount (e.g., 15-25%), focusing on the antyodaya (the last person).

• Shift to Direct Cash Transfers (DBT): Replace physical grain distribution with direct cash transfers to beneficiary bank accounts. This empowers choice, reduces the FCI’s colossal economic cost of procurement/storage/distribution, and minimises leakage.

• Nutritional Diversification: Convert a significant percentage of Fair Price Shops into “Nutrition Hubs” offering pulses, millets, oils, eggs, etc. Beneficiaries could use cash vouchers or a “food wallet” to purchase a more diverse, nutritious basket, combating micronutrient deficiencies.

4. How does the current urea subsidy harm agricultural sustainability, and what specific policy changes are recommended?

The urea subsidy harms sustainability by making nitrogen fertiliser artificially cheap, leading to grossly imbalanced use (NPK ratio skewed to 10:3:1 vs. the recommended 4:2:1). This:

• Degrades long-term soil health.

• Causes nitrate pollution of groundwater.

• Increases greenhouse gas emissions.

• Encourages diversion and smuggling due to the high price differential.
  Recommended changes:

1. Ideal Solution: Replace the product subsidy with a Direct Cash Transfer per hectare to farmers, allowing fertilisers to be sold at market prices. This promotes balanced, soil-test-based use.

2. Immediate Step: Bring urea under the Nutrient-Based Subsidy (NBS) regime (currently only for DAP and MOP). This would provide a fixed subsidy per kilogram of nutrient, reducing the price distortion between N, P, and K fertilisers.

3. Administrative Shift: Move the subsidy administration from the Department of Fertilizers to the Ministry of Agriculture to align it with farmer welfare and sustainable farming goals.

5. What is the suggested “grand bargain” or integrated approach to reforming these subsidies, and what political challenges does it face?

The integrated approach suggests merging the rationalised food and fertiliser subsidies with the existing PM-KISAN scheme to create a consolidated, augmented “Agricultural Support and Nutrition Security” Direct Cash Transfer. This would provide a larger, streamlined payment to identified households (both poor consumers and farmers), potentially with green conditionalities to promote crop diversification or sustainable practices.
Political Challenges:

• Entrenched Entitlement: Subsidies are seen as political rights. Reducing coverage or shifting from in-kind to cash is portrayed as taking something away.

• Populist Backlash: Opponents can easily frame rationalisation as an “anti-poor” or “anti-farmer” move.

• Federal Complexity: Agriculture is a state subject; reform requires difficult consensus-building with state governments.

• Implementation Trust: Success hinges on flawless DBT infrastructure and convincing the public that cash is better than kind. Overcoming these requires phased implementation, clear communication of ecological and fiscal benefits, and demonstrable pilot successes.