Rationalising Fertiliser Subsidy in India: Key Issues and Policy Options

Given the importance of agriculture in any sizable country to feed its people, most countries have subsidised agriculture in the past. Fertiliser subsidy in India has succeeded in achieving its objective of increasing fertiliser consumption in agriculture and hence, raising food production, but it has led to some problems because some fertiliser products have been priced very low. This paper suggests the following alternative policy options: (a) switch to direct cash transfers to farmers on per ha basis (say between Rs 6000-7500/ha), free up the urea sector with imports at zero duty, and let domestic prices be determined by demand and supply forces in open markets; (b) take up a soil health care programme seriously, and if desirable, tag cash transfers to this condition, and communicate that to farmers effectively; and (c) encourage Indian investments in nitrogenous fertilisers in Gulf countries (e.g., Iran, Kuwait, Oman, etc.) where gas prices are typically less than $3 per MMBTU compared to the pooled price of $10.5 per MMBTU in India, with some medium to long-term agreements for imports. This will promote not only efficiency in production but also in consumption, and provide a stable policy environment in the fertiliser sector to ensure efficient and sustainable growth, and contributing to India's overall food-feed-fibre security. [Working Paper 307]