Fertilizer reform: India must seize this moment to replace its subsidy regime with a high-yield policy

This imperative has since been sprung centre-stage by a war in West Asia that has disrupted our imports of urea and its feedstock gas, both of which form large shares of domestic usage and have seen global prices flare up.

The fiscal burden that this imposes on the government should be enough to trigger action. The longer we retain the status quo, the worse this war’s likely impact will be through inflated import bills, which look poised to enlarge rapidly if peace proves elusive.

In general, India privileges the fertilizer industry for allocations of natural gas, but right now, its allotment has been slashed by 30%, while prices have been held firm, as the Centre prioritizes piped natural gas supply to homes for cooking and the compressed kind used by vehicles as a fuel.

In recent times, half of India’s natural gas requirement has been met by shipments, the bulk of them from Qatar in its liquefied form, LNG. Our reliance on this Gulf state for LNG has dropped from above 80% to below 50% over the years as we diversified our sources to include the US, UAE, Oman, Australia and Mozambique.

However, Iran’s clamp on the Strait of Hormuz—or attempt to play gatekeeper—has cut off LNG supplies to big buyers like Japan, South Korea and Taiwan, which are now in a scramble for options that has pushed up LNG prices in the global spot market.

Even for those with contracts, pricing is typically linked to oil price indices such as the Japanese Crude Cocktail, and when oil gets dearer, so do these contracted supplies.

Should India cling to its outdated fertilizer subsidy regime, the public money needed to fund it would bloat. Even if Hormuz opens up to pre-war levels of traffic and production resumes at the LNG plants in the Gulf that have been shut down, the ripple effect of this supply shock could keep the dollar price of gas high and the rupee weak, making it that much harder for the government to keep its spending in check.

Fertilizer reform would both ease pressure on the fisc and raise the efficiency of India’s crop production. Heavily subsidized urea releases nitrous oxide into the air, a global warming gas, and pollutes the ground water with nitrates.

To boost farm output, we need a judicious mix of fertilizers. While the ideal proportion of nitrogenous (N), phosphatic (P) and potassic (K) fertilizers is 4: 2: 1, a long-running subsidy skew in favour of N has resulted in an N: P: K farm ratio of 10.9: 4.4: 4. This depresses nutrient conversion into grain by plants and partly explains why our agricultural value addition per unit of crop area is only 38% of China’s.

To secure a mix of fertilizer types that is optimal for crop output, India should rid fertilizer prices of their subsidy. An artificial incentive to use a specific fertilizer over others only distorts market choices and masks demand patterns that would otherwise reflect what farmers deem best for their farms.

The money saved by putting an end to a distortive subsidy regime could be sent to individual farmers as income support in proportion to the area they cultivate, so that cultivators have no reason to complain. A cost-benefit analysis rarely makes such a robust case for reform. And there’s no better time to act than now.