The Economics of Fertiliser Subsidies

Why governments subsidise fertiliser, how India's urea subsidy distorts nutrient use, and what reforms have been tried.

Fertiliser is one of the most important inputs for raising crop yields. Many governments subsidise it to keep food production high and farm costs low. India spends large sums on fertiliser subsidies, often among the largest items in its subsidy budget.

How India’s subsidy works

India pays fertiliser companies to sell to farmers at controlled, below-cost prices. The subsidy is especially large for urea, a nitrogen fertiliser, whose retail price has been held low for many years. Other fertilisers, containing phosphorus and potassium, receive subsidies under a nutrient-based scheme, but their prices have risen more.

Distortions

Because urea is much cheaper relative to other fertilisers, farmers tend to overuse it. Soil scientists recommend a balanced ratio of nitrogen, phosphorus and potassium, but Indian farmers often apply far more nitrogen than recommended. This can:

Damage soil health over time.
Pollute groundwater and rivers with nitrates.
Waste money, since extra nitrogen adds little to yields.

Cheap subsidised urea has also been diverted to industrial uses and smuggled to neighbouring countries.

Reforms

Neem-coated urea, made mandatory in 2015, reduced diversion to industry because it is less suitable for non-farm uses.
Soil Health Cards, launched in 2015, give farmers information about their soil’s nutrient needs.
Direct benefit transfer for fertilisers tracks sales to farmers through point-of-sale machines.

Many economists argue for moving toward direct cash support to farmers while letting fertiliser prices reflect costs, which would encourage balanced use. This is politically difficult.

The price ratio problem

If a bag of urea costs a few hundred rupees but a bag of phosphate fertiliser costs several times more, a farmer on a tight budget will buy more urea and less phosphate, even if the soil needs phosphate. The subsidy structure, not the soil's needs, shapes the choice.

Thinking more fertiliser always means more food

Beyond a certain point, extra fertiliser adds little to yields and harms soil and water. Balanced use, matched to soil needs, produces better results than simply applying more.

Key takeaways

India spends heavily on fertiliser subsidies, especially for urea.
Very cheap urea leads to overuse of nitrogen and unbalanced soil nutrition.
Overuse harms soil health and water quality.
Neem-coated urea, Soil Health Cards and tracking sales are among the reforms.