A Growing Fiscal Burden

Between 2014–15 and 2024–25, fertiliser consumption increased by only about 20%, while subsidy expenditure rose by roughly 120%. This surge in subsidy outlay was driven not by higher volumes but by India’s dependence on imported natural gas, phosphates, and potash, and by global price shocks.

Such fiscal pressure might be defensible if fertilisers were delivering proportionately higher yields. But evidence increasingly suggests the opposite. A report by the Fertilizer Association of India (FAI) indicated that the return on nitrogen, phosphorus, and potassium (NPK) fertilizer use has declined from 12kg of additional grain per kilogram of fertilizer to a mere 8kg within a decade.

In economic terms, India is pouring more public money into an input whose marginal productivity is falling, while its marginal fiscal cost keeps rising. We are spending more each year to extract less additional output.

How Cheap Fertilizer Distorts Farmer Choices

This is not due to farmers' ignorance. It is the predictable consequence of distorted prices. India’s fertiliser policy caps farm-gate prices and compensates manufacturers for the difference, keeping fertilizer artificially cheap for farmers.

Farmers respond rationally to these signals by increasing fertilizer use in the hope of better yields, or at least to maintain yields. Reforms such as neem-coated urea and Aadhaar-linked point-of-sale systems have improved monitoring and reduced diversion. But they leave the central distortion untouched. As long as fertilizer remains artificially cheap, overuse is built into the system.

Environmental Costs

What appears cheap at the farm gate is costly elsewhere.

Decades of nitrogen-heavy fertilisation have created severe nutrient imbalances. Current NPK use ratios (10.9:4.4:4) diverge sharply from agronomic recommendations (4:2:1). Soil Health Card data analysed by the Centre for Science and Environment show organic carbon content of the soil, which was a healthy 2.5% at the time of our independence, has now declined to a dangerous level of 0.3%. According to the Institute of Soil Sciences (an ICAR institute), a minimum organic carbon content of 1.5% is needed to keep the soil fertile. Our soil is in the ICU and needs to be retrieved. 

Over time, excessive reliance on synthetic fertilizers weakens soil structure, reduces microbial activity, and erodes the soil’s natural nutrient-cycling capacity. Farmers are then forced to apply ever larger quantities, locking them into a low-efficiency, high-input trap.

Water quality offers an even clearer warning, with states such as Punjab and Haryana, besides the western parts of the country and parts of Maharashtra, documenting rising nitrate concentrations in groundwater linked to intensive nitrogen application. 

While fertilizer is cheap for the user, society pays through degraded soils, polluted water, and long-term health costs, none of which appear in the subsidy bill.

Why Incremental Fixes Are Not Enough

As long as subsidies reward volume rather than efficiency, behavioural change will be limited. Correcting prices is necessary but not sufficient. Farmers lack credible, low-risk pathways to reduce chemical dependence without jeopardising incomes. Simply withdrawing subsidies without alternatives would be politically and economically untenable.

India already has the administrative infrastructure to do this.

Most states now maintain digitised land records under the Digital India Land Records Modernisation Programme (DILRMP). The Union government uses these, along with Aadhaar and bank linkages, to run PM-KISAN for over 10 crore farmer families.

Fertilizer subsidies should be gradually redirected from manufacturers and paid directly to farmers. This can be done as direct benefit transfers linked to farmers’ land holdings. Agronomic research can be used to estimate optimal fertilizer use per hectare by crop and agro-climatic zone. Farmers would receive a subsidy equivalent to the product of the cost of this optimal quantity and their cultivated area, based on the number of crops grown per year. 

Fertilizers would then be sold at market prices. Direct transfers will continue to support the farmers without rewarding excess use.

Low-Chemical Farming

Though price correction alone can help prevent further deterioration, it will not help restore soil health. 

Organic and low-chemical farming should be viewed as a transition strategy. While India’s certified organic area has expanded under the National Programme for Organic Production (NPOP) and the Participatory Guarantee System of India (PGS-India), it remains marginal, relative to potential demand for chemical-free products domestically and internationally.

Small landholders face a binding constraint: certification. NPOP certification is costly, heavy on documentation, takes up to three years, and is dependent on third-party auditors, making it out of reach for the large majority of Indian farmers. Participatory Guarantee Systems (PGS), by contrast, are low-cost, peer-review-based, designed for domestic markets, and recognised by the FAO as suitable for small landholders.

Participatory Guarantee Systems

PGS should be mainstreamed as the default entry point into organic and low-chemical farming. Farmer-producer organisations can use PGS to stabilise production, access domestic markets, and build governance capacity. Public agencies and large buyers should explicitly recognise PGS for domestic procurement, while the government should provide a degree of fiscal incentive to farmers who are certified as using non-chemical nutrients and intend to make the switch.

Thus, India’s fertilizer subsidy must shift from subsidising inputs to enabling efficiency.

(Rajiv Kumar is an eminent economist and Chairperson, Pahlé India Foundation. He has served as Vice-Chairman, NITI Aayog. Samriddhi Prakash is a Research Associate at Pahlé India Foundation. Views are personal.)