Summary: Given the importance of agriculture in any sizable country to feed its people, most countries have subsidised agriculture in the past, be they developed countries like the United States of America or countries in the European Union or Japan and Korea, or now emerging economies like China and India. The type of support, of course, varies widely across countries. The Government of India (GoI) has supported agriculture through budgetary provisions as well as through revenues foregone and a sizeable portion of budgetary support goes towards fertiliser subsidy.

Fertiliser subsidy in India has succeeded in achieving its objective of increasing fertiliser consumption in agriculture and hence, raising food production, but it has also led to some problems because some fertiliser products have been priced very low. There are three key issues with regard to fertiliser subsidy in India: (1) rising amounts of fertiliser subsidy in the budget and how far they are financially sustainable; (2) extremely low prices of urea leading to imbalanced use of N, P and K, as also misuse of urea (like diversion to neighbouring countries and its use for non-agricultural purposes); and (3) lack of investment flows to the sector at home, leading to rising imports in the wake of uncertainty on fertiliser subsidy policy issues and delayed payments to industry.

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.