Fertiliser subsidy

Topic: Land Reforms, the Green Revolution and Farm Subsidies · NCERT: Class 11, Ch 2 "Indian Economy 1950-1990"; Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"

Meaning

A fertiliser subsidy is money the government pays so that farmers can buy fertiliser at a price below its real cost. In India, this money goes to the fertiliser manufacturer or importer, not to the farmer.

For urea, the formula is: Urea subsidy = delivered cost of urea at the farm gate − net market realisation of the maker [2]

It matters for three reasons:

• It helped small farmers use the costly inputs that HYV seeds (high-yielding variety seeds, which give much more grain per hectare) need during the Green Revolution.
• Today it is one of the largest subsidy bills.
• It also distorts how farmers use fertiliser.

Explanation

Why it began: spreading the Green Revolution

• HYV seeds need costly inputs. They work only with fertiliser, pesticide and assured irrigation.
• Only big farmers could afford all of these.

• So people feared that big farmers would take most of the gains.

• How the state responded (NCERT):

• low-interest loans to small farmers
• subsidised fertiliser

• research institutes that reduced the pest risk

• Result: "Output on small farms equalled the output on large farms in the course of time."

• NCERT's lesson: without "an extensive role" for the state, the Green Revolution "would have favoured the rich farmers only".
• Critical view: many studies find that inequality still widened, mainly in Phase I (mid-1960s to mid-1970s).
• Regional inequality: Punjab, Haryana and western UP gained most. Eastern India and rain-fed areas lagged behind.
• Interpersonal inequality: landlords evicted tenants, and machines replaced farm workers.

How it works today: two separate systems

• (a) Urea is under price control
• Urea is sold at a statutorily notified MRP (a maximum retail price fixed by the government under law), whatever its cost of production [2].
• MRP: ₹242 per 45 kg bag, not counting neem-coating charges and taxes [2].
• The government pays the gap between cost and price to the manufacturer or importer.
• Net market realisation is roughly the MRP minus dealer margins and similar charges.

• Worked example (numbers for illustration only):

  • Delivered cost is ₹1,500 per bag and net realisation is ₹220.
  • Subsidy = ₹1,500 − ₹220 = ₹1,280 per bag.
  • The farmer pays only about ₹242.

• (b) P and K fertilisers come under the Nutrient Based Subsidy (NBS)

• NBS has been in force since 1 April 2010 [3].
• The government pays a fixed subsidy per kg of nutrient: nitrogen (N), phosphorus (P), potassium (K) and sulphur (S) [3].
• The rates are fixed once or twice a year, based on world prices of fertilisers and raw materials [3].
• It covers DAP (di-ammonium phosphate), MOP (muriate of potash) and complex fertilisers. Their prices are partly decontrolled, which means the government does not fix them fully.
• When world prices jump, the government gives special packages on DAP on top of the NBS rates [11].
• Urea is outside NBS.

Why the subsidy bill rises or falls

• World prices of fertilisers and raw materials:

• India imports a large share of its fertiliser, so a rise in world prices raises the subsidy bill directly.

• Fixed urea MRP:

• The farmer's price does not change.

• So every rise in the cost of urea is added to the subsidy.

• Amount used:

• More use means a bigger bill.

• Schemes such as PM-PRANAM reward states that use less.

• Leakage:

• Urea diverted to industry used to raise the bill.
• Neem-coating and DBT are meant to stop this.

The problems: blocked price signals and a skewed NPK ratio

• Price signal (NCERT Box 2.6): a price rise tells people that a good is scarce, so they economise (use less of it).
• When fertiliser is cheap, farmers overuse it.

• Overuse harms the soil and water.

• NPK ratio: the ratio in which nitrogen, phosphorus and potassium are applied to the soil.

• The recommended ratio is 4:2:1, but India's use is heavily skewed towards nitrogen [6].
• Why: urea has a fixed, very low price, while P and K fertilisers cost much more. This price gap pushes farmers towards urea [6].

• Qualification: ICAR (Indian Council of Agricultural Research) says no single "ideal" ratio fits the whole country. The right ratio depends on the crop, soil and climate [6].

• Nutrient use efficiency (NUE): the share of applied nutrient that the crop actually takes up.

• In India: N 30–45%, P 15–25%, K 50–60% [8].
• Worked example:
  • A farmer applies 100 kg of N.
  • At 35% NUE, the crop uses 35 kg.
  • The other 65 kg is lost through evaporation and leaching (washing down into groundwater), and it pollutes the environment.

In India

• Who manages it: the Department of Fertilizers.

• Its final budget allocation was raised to ₹1,91,836.29 crore (2024-25) [5].

• Import dependence (2023-24) [9]:

• Consumption was about 601 LMT (lakh metric tonnes), and domestic production was 503.35 LMT.
• Imports were 177 LMT.
• Production rose from 385.39 LMT (2014-15) to 503.35 LMT (2023-24).

• Share met by domestic production: urea about 87%, DAP about 40%. MOP is 100% imported.

• Reforms:

• Neem-coated urea (fully mandated 2015):
  • The neem coat releases nitrogen slowly, so it stays in the soil longer [2].
  • Coated urea is hard to divert to industry, such as glue or plywood makers.
• DBT in fertilisers (nationwide from 2018):
  • DBT means Direct Benefit Transfer.
  • 100% of the subsidy is paid to companies only on actual sales to farmers [4].
  • Each sale is recorded on a Point of Sale (PoS) machine at the retail shop [4].
  • The buyer is identified by Aadhaar, KCC (Kisan Credit Card) or Voter ID [4].
  • The money still goes to companies, not into farmers' bank accounts.
• Nano urea (IFFCO, 2021):
  • It is a liquid urea that is sprayed on leaves.
  • It is claimed to improve nutrient use efficiency, but its efficacy is debated.
• PM-PRANAM (2023):
  • A state that uses less chemical fertiliser (urea, DAP, NPK, MOP) than its average of the previous 3 years gets 50% of the subsidy saved as a grant [7].
  • In 2023-24, 14 states together cut their use by 15.14 LMT [7].

Don't confuse with

• Urea pricing vs NBS: urea has a fixed statutory MRP, and its subsidy is whatever gap remains between cost and price. Under NBS, P&K fertilisers get a fixed subsidy per kg of nutrient, and their prices are partly decontrolled [2][3].
• DBT in fertilisers vs PM-KISAN: under DBT in fertilisers, the money goes to companies after PoS-recorded sales [4]. PM-KISAN pays ₹6,000 a year directly into farmers' Aadhaar-seeded bank accounts [10].
• Input subsidy vs MSP: a fertiliser subsidy lowers the prices farmers pay. MSP (Minimum Support Price) raises the prices farmers receive. Both improve agriculture's terms of trade, which are calculated as (prices received index ÷ prices paid index) × 100.
• Subsidy vs public investment: a subsidy is a recurring payment that lowers input prices. Public investment builds lasting assets such as irrigation, roads and research, and studies find that it gives higher returns.

Prelims Hooks

• Urea is outside NBS. It is sold at a statutory MRP of ₹242 per 45 kg bag, not counting neem-coating charges and taxes [2].
• NBS started on 1 April 2010. It pays a fixed subsidy per kg of N, P, K and S for P&K fertilisers [3].
• Trap: DBT in fertilisers pays companies, not farmers, on sales recorded on PoS machines [4].
• The recommended NPK ratio is 4:2:1, and actual use is skewed towards N [6]. NUE in India: N 30–45%, P 15–25%, K 50–60% [8].
• MOP is 100% imported. About 87% of urea and about 40% of DAP come from domestic production (2023-24) [9].
• PM-PRANAM gives states 50% of the subsidy saved, measured against their previous 3-year average use [7]. Neem-coated urea was fully mandated in 2015. IFFCO launched nano urea in 2021.

Mains Points

• Growth with equity vs the subsidy trap: the subsidy helped small farmers adopt HYV technology, and NCERT credits state support for this. But the same subsidy now does harm:
• cheap urea skews the NPK ratio
• applied nitrogen is wasted
• soil and water are damaged
• much of the benefit goes to the fertiliser industry and prosperous regions

Suggested reforms: target the subsidy better instead of abolishing it, bring urea under NBS-style pricing, and use DBT and PM-PRANAM-type incentives for states.

• Fiscal and strategic trade-off: a budget of about ₹1.92 lakh crore (2024-25) [5] crowds out (uses up money that could have gone to) public investment in irrigation, research and markets, which gives higher returns. Heavy import dependence (100% for MOP, about 60% for DAP) [9] ties the subsidy bill to world prices. So balanced fertiliser use also serves food security. Fixed cash support such as PM-KISAN [10] protects farmers' incomes without distorting prices.

Related concepts

• NPK ratio
• Nano urea
• Terms of trade for agriculture
• Public investment in agriculture

Read more

• Equity risks, state support and the subsidy debate