One reform can yield multiple benefits: India should send its fertilizer subsidy directly to farmers

The current fertilizer subsidy model, introduced in 2017-18, claims to be a direct benefit transfer (DBT), yet it does not reach farmers directly or entirely. The funds are transferred to fertilizer firms, not cultivators. Fertilizer makers are reimbursed only after Aadhaar-authenticated sales at point-of-sale (PoS) terminals.

This model has improved traceability and curbed fertilizer diversion to some extent, but not tackled the problem of artificially low retail prices that fuel fertilizer overuse, damage soil health and leave scope for misuse.

The urgency of reform was highlighted in the 2015-16 Economic Survey, which revealed that up to 65% of subsidized urea never reached small and marginal farmers. Specifically, 41% was diverted for industrial use or cross-border smuggling. PoS checks introduced in 2016 did reduce diversion, as seen in declining urea sales, but the core problem persists.

According to the Indian Council of Agricultural Research, the ‘fertilizer response ratio’ dropped from about 13.4kg of grain per kg of nutrient in the 1970s to just 3.7kg by 2005, a sharp decline in efficiency. This is largely driven by rampant overuse of cheap urea.

Skewed fertilizer use does not just degrade soil, it also seeps into our food and water, harming public health. Excess nitrogen and imbalanced nutrients have been linked to thyroid disorders, diabetes and micronutrient deficiencies, turning a farm-level distortion into a national nutrition crisis.

Our fertilizer policy thus needs a structural overhaul to combine DBTs to farmers with nutrient caps. Instead of routing subsidies through companies, cash should be transferred straight into the bank accounts of farmers as season-specific, per-hectare entitlements.

This would grant them purchasing power and also enable fertilizer sales at market prices, which would empower price signals, discourage overuse and curb diversion. Agri Stack data can be leveraged to calculate entitlements, while e-Rupi vouchers can be issued with nutrient limits for nitrogen (N), phosphorus (P) and potassium (K), adjustable for soil health. Like phosphorus and potassium, urea must also be brought under the NBS regime to rectify India’s chronic nitrogen overuse.

Robust and transparent verification mechanisms should be used to make the DBT system tamper-proof and trustworthy. Such a policy would align farm incentives with our goals of sustainability and efficiency.

The fiscal case for reform is compelling. Using the actual 2024-25 spend of ₹1.83 trillion as a baseline, shifting to a farmer-focused DBT system that cuts leakage to say, 10%, could save nearly ₹57,000 crore if urea diversion falls from 41% to 10%, and about ₹1 trillion if overall fertilizer subsidy leakage drops from 65% to 10%. Even on the 2025-26 projection of ₹1.56 trillion, the potential savings range from ₹49,000 crore to ₹86,000 crore.

The benefits would go beyond fiscal savings. While price rationalization, combined with nutrient caps, will help curb nitrogen overuse to restore soil fertility and reduce groundwater contamination as well as greenhouse gas emissions, better balanced application of NPK fertilizers could also strengthen farm yields and resilience as climate variability intensifies.

Redirecting even half of the subsidy savings towards irrigation infrastructure, soil testing labs and farmer extension services could spark a transformation in productivity and sustainability. A rationalized subsidy regime would not just be a financial reform, but an ecological and agricultural reset that India urgently needs.

What about farmer resistance? It’s possible farmers will turn around and say they prefer buying fertilizers at subsidized prices over cash transfers (in fear of higher upfront costs and transfer delays). The solution lies in smart design. Pre-season disbursal of e-Rupi vouchers, redeemable only for fertilizer purchases, could ease farmer concerns.

Implementation should start small and scale smart. It could begin with pilot projects in diverse agro-climatic zones and then expand to states that have integrated India’s Agri Stack with Soil Health Cards, before a nationwide rollout with public dashboards that track fiscal savings and soil metrics for an NPK balance.

Smarter subsidy delivery through DBTs to farmers could preserve fertilizer affordability, restore price signals, reduce diversion and fix incentives to keep farm soil healthy. Done right, it can save about ₹75,000 crore annually, which could be used to fund irrigation projects, cold chains and tech adoption.

This shift would anchor our policy in data, discipline and dignity for farmers. This is not just sound economics, it is good governance and a step towards an agricultural transformation. As the policy choices we make today will determine the future of Indian farming, we must act on this right away.

Ananya Khurana contributed to this article.

The authors are, respectively, chair and fellow, Institute for Competitiveness.