India's substantial fertiliser subsidy bill is projected to remain a significant burden on the exchequer for the coming years, according to a recent analysis by the credit rating agency ICRA. The agency has forecast that the government's fertiliser subsidy outlay for the financial year 2026-27 (FY27) will be around Rs 1.9 lakh crore. This projection indicates that while there may be a marginal decline from the record highs of recent years, the subsidy expenditure will continue to consume a major portion of the national budget.
Drivers of the Persistent High Subsidy Burden
The ICRA analysis points to several key factors that will keep the subsidy bill elevated. A primary reason is the volatility in international prices of key fertiliser raw materials and finished products, such as urea, di-ammonium phosphate (DAP), and muriate of potash (MOP). Despite some softening from their peaks, global prices remain unpredictable due to geopolitical tensions, supply chain disruptions, and fluctuating energy costs.
Furthermore, the Indian government's commitment to the Nutrient-Based Subsidy (NBS) regime for phosphatic and potassic (P&K) fertilisers necessitates continuous support to shield farmers from global price shocks. The government fixes the subsidy rates for these nutrients to ensure affordability for farmers while allowing companies to set retail prices. Any spike in international prices directly translates into a higher subsidy payout by the Centre.
Recent Trends and Future Trajectory
To understand the FY27 projection, it is essential to look at the recent subsidy trajectory. The fertiliser subsidy outlay witnessed a massive surge, reaching an unprecedented Rs 2.5 lakh crore in FY23 following the Russia-Ukraine conflict which disrupted global supply chains. For the current financial year, FY25, the government has allocated Rs 1.64 lakh crore in the Union Budget, which ICRA believes is a realistic estimate given the present price trends.
The marginal easing projected for FY27 is contingent on relative stability in the global fertiliser market. However, the agency cautions that any major geopolitical event or supply-side constraint could easily push the costs higher again. The government's focus on ensuring national food security by promoting adequate fertiliser use means the subsidy mechanism is unlikely to be dismantled in the near future.
Implications for the Economy and Industry
A sustained high subsidy outlay has wide-ranging implications. For the government, it represents a significant fiscal challenge, limiting the funds available for other critical infrastructure and social sector schemes. Managing this large expenditure requires careful fiscal planning and efficient subsidy delivery mechanisms like the Direct Benefit Transfer (DBT) system.
For the domestic fertiliser industry, the subsidy regime provides stability. It ensures that manufacturing companies and importers receive timely payments for the difference between the cost of production/import and the government-mandated selling price. This stability is crucial for maintaining a steady supply of fertilisers to the farming community across the country. However, the industry also remains vulnerable to changes in subsidy policy and delays in government payments.
In conclusion, ICRA's projection of a Rs 1.9 lakh crore fertiliser subsidy in FY27 underscores a persistent structural element in India's agricultural and fiscal policy. Balancing the needs of farmers for affordable inputs with the government's fiscal health will continue to be a key policy dilemma for the foreseeable future.
