Government Must Rationalize Agri Subsidies to Sustain Reform Momentum
Prime Minister Narendra Modi has declared his government operates in "Reform Express" mode. This administration has implemented significant reforms in income tax, GST, and job guarantee schemes. It has also concluded free trade agreements. These actions deserve recognition.
External pressures, including tariff shocks from US President Donald Trump, have accelerated long-overdue reforms. The outcomes have surpassed expectations. First advance estimates project India's economy will grow at 7.4 percent in 2025-26. Consumer inflation dropped to 1.3 percent in December 2025.
Agricultural Growth Faces Challenges
However, agricultural GDP growth likely stands at only 3.1 percent for FY26. This marks a substantial decline from 4.6 percent in the previous year. Low consumer price inflation partly stems from collapsing food prices. Onion prices fell 48 percent in December compared to last year. Potato prices dropped 35 percent. Major pulses sell 10 to 30 percent below their Minimum Support Prices.
Farmers receive little emergency support from the government in this depressed scenario. Achieving self-sufficiency in pulses remains difficult even with dedicated missions. Current incentive structures heavily favor water and fertiliser-intensive crops like rice, sugarcane, and wheat.
Massive subsidies from states and the Centre drive this imbalance. Free or highly subsidised power and fertilisers, especially urea, distort cropping patterns. Open-ended procurement in some states exacerbates the problem.
Budgetary Pressures from Subsidies
If the Modi government truly embraces reform, it must address two critical budget items urgently. Food subsidy may reach Rs 2.25 trillion. Fertiliser subsidy could climb to Rs 2 trillion. Together they constitute about 8 to 8.5 percent of the total budget, which is around Rs 51 trillion. Both operate sub-optimally.
The food subsidy represents the difference between the economic cost of procuring, stocking, and distributing rice and wheat by the Food Corporation of India and the amount recovered from Public Distribution System beneficiaries. FCI's economic cost hovers around Rs 42 per kg for rice and Rs 30 per kg for wheat.
Under the PM Garib Kalyan Yojana, the government provides 5 kg of free rice or wheat to approximately 813 million people. This covers roughly 56 percent of India's 1.5 billion population. The introduction of point of sale machines in over 5 lakh fair price shops reduced massive leakages in PDS. This reform by the Modi government proved significant.
Rationalizing Food Subsidy Coverage
But how rational is giving free food to 56 percent of the population? According to World Bank extreme poverty criteria, India's poverty declined to just 5.3 percent of the population in 2022. Even at a higher poverty line, poverty stood at about 24 percent.
Only the extremely poor need free food. Others should pay at least half the Minimum Support Price. Otherwise, this policy becomes the biggest political dole the government offers consumers for votes. The system even gives free rice to rice growers, which is irrational. These growers first sell all their paddy to the government and then receive free rice with enhanced economic cost and subsidy.
Reforming this system requires scaling down coverage gradually. Reduce from the current 56 percent to 40 percent, then to 25 percent, and finally to about 15 percent. If political courage lacks, the government should at least embark on direct cash transfers to rice and wheat producers.
Additionally, convert at least 20 percent of fair price shops into nutrition hubs. These hubs should offer pulses, oilseeds, milk, eggs, fruits, and vegetables. These items provide more nutrition than just wheat and rice. Beneficiaries could receive coupons to buy more diversified food.
Addressing Fertiliser Subsidy Issues
Fertiliser subsidy constitutes the second largest subsidy in the Union budget. At about Rs 2 trillion, it exceeds the entire budget of the Ministry of Agriculture and Farmers' Welfare. Excessive urea subsidy essentially subsidises toxins.
Urea is not used in a balanced manner. Excessive use of phosphatic and potassic fertilisers contaminates groundwater and increases greenhouse gas emissions. A sizeable portion, about 20 to 25 percent, also leaks away.
The solution involves direct cash transfers to farmers and decontrolling fertiliser pricing. If immediate action proves impossible, the government can at least bring urea under the nutrient-based subsidy. Provide the same subsidy as on DAP and MOP. Also, shift the fertiliser subsidy from the Department of Fertilisers to the Ministry of Agriculture and Farmers' Welfare, which deals directly with farmers.
The Path Forward for Reforms
Merging both food and fertiliser subsidies with the augmented PM Kisan scheme would demonstrate genuine "Reform Express" mode. This approach could rationalise agricultural subsidies effectively. It would support farmers more directly while reducing fiscal burdens.
The Modi government's reform drive shows promise. But sustaining economic performance in FY27 depends on additional reforms. The agri-food space demands urgent intervention. Rationalising subsidies represents a crucial step toward more efficient and equitable agricultural policies.
