Syllabus: Issues related to farm subsidies and MSP
Context
- Economists argue for urgent restructuring of India’s fertiliser subsidy amid broader economic reforms.
- Rising fiscal burden and environmental stress have intensified reform debates.
What is Fertiliser Subsidy?
- Government compensates manufacturers for the gap between production/import cost and retail prices.
- Keeps fertilisers, especially urea, artificially cheap for farmers.
- Intended to support food security, but has become highly distortionary.
Current Status and Trends
- Fertiliser subsidy is the second-largest Union Budget subsidy, after food subsidy.
- Expected to touch around ₹2 lakh crore in FY26.
- Urea absorbs nearly two-thirds of total subsidy expenditure.
- Urea sold at ₹242 per 45-kg bag, among the lowest globally.
- High import dependence: 78% natural gas, 90% phosphatic fertilisers, almost 100% potash.
- Nutrient imbalance worsened; N:P:K ratio at 10.9:4.4:1, far from recommended 4:2:1.
Why Subsidy is Needed
- Food security: Enabled Green Revolution and rapid cereal output expansion.
- Fertiliser–grain response ratio was 1:10 in the 1970s, ensuring self-sufficiency.
- Small and marginal farmers dominate agriculture and need protection from price volatility.
- Sudden deregulation would raise input costs and reduce fertiliser use.
- Subsidy ensures affordable cultivation, especially in rain-fed regions.
- Helps contain food inflation by moderating production costs.
- Acts as risk buffer amid monsoon variability and climate uncertainty.
Key Challenges
- Low nutrient use efficiency; only 35–40% nitrogen absorbed by crops.
- Excess use leads to soil degradation and groundwater nitrate pollution.
- Productivity gains have stagnated despite rising fertiliser consumption.
- Fertiliser–grain response ratio declined to around 1:2.7 by 2015.
- Leakages and diversion prevalent due to price-controlled urea.
- Around 20–25% urea diverted to industries or smuggled.
- Heavy imports create fiscal and geopolitical vulnerabilities.
Way Forward
- Gradual price decontrol with income support, shifting towards direct transfers.
- Bring urea under Nutrient-Based Subsidy (NBS) framework.
- Correct nutrient imbalance without increasing total subsidy burden.
- Use Agri Stack and digital databases for precise targeting.
- Promote balanced and precision farming to improve efficiency.
- Expand PoS-based delivery and e-vouchers to curb diversion.
Conclusion
- Fertiliser subsidy reform must be smarter, greener, and equitable, not withdrawal-driven.
- Correct pricing can save around ₹40,000 crore annually.
- Current macroeconomic stability offers a timely window for reform.