Soaring fertilizer bills are pushing India to reshape a decades-old subsidy system that helped transform a vulnerable food importer into one of the world’s agricultural heavyweights.
The country’s farmers use more urea – a nitrogen-heavy crop nutrient – than the US and Brazil combined, buoyed by government support that keeps prices well below market rates. As the war in Iran upended global fertilizer and energy flows, the cost to procure it more than doubled and the cargoes of gas needed to produce its own grew more scarce. That has swelled an already hefty subsidy bill and added to a surge in foreign-exchange outflows that’s put the rupee among Asia’s worst-performing currencies this year.
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Fertilizer prices have eased as more workarounds are put in place, but the financial damage already done is sparking a government-led effort to rein in use, a sensitive issue in a country where farmers make up a crucial voting bloc. Officials have campaigned with growers nationwide to highlight the perils of excessive fertilizer on soil health and a new system is being tested that could change how the nutrients are sold longer-term. Even Prime Minister Narendra Modi has urged cutbacks.
The country is in the middle of its biggest annual growing season, when fertilizer use peaks. Few farmers seem eager to change long-held practices, but with flows of Middle East nutrients and gas yet to normalize, cooperatives in some key states are taking steps to ration supply as the government seeks to rein in spending, according to people familiar with the matter. Combined with a lackluster monsoon, the situation risks cutting into India's harvest – potentially boosting food inflation at home and in the dozens of countries that rely on its rice and produce abroad.
“If disruptions linked to the Strait of Hormuz persist, the key concern is not only fertilizer availability, but timely access during critical application windows,” said Laura Cross, director of market intelligence at the International Fertilizer Association. “Given India’s scale, this would have implications beyond the domestic market.”
India’s urea subsidy followed the food crises of the 1960s, when the government embraced the Green Revolution to cut dependence on grain imports and avert famine. Cheap nitrogen fertilizer became critical to raising wheat and rice yields, prompting successive governments to cap urea prices and absorb the difference between market and retail costs.
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The policy helped turn India into a food-surplus nation – it is today the world’s No. 1 rice exporter – while protecting small farmers and containing food inflation. But it has also made the support politically difficult to dismantle, even as the cost climbs.
India, one of the world’s largest urea buyers, paid nearly double pre-war prices for supplies in an April tender as flows through the Strait of Hormuz were choked off. In addition, the country has faced lofty costs for the natural gas imports – many of which also come from the Middle East – that serve as a crucial feedstock for domestic fertilizer production. The country’s fertilizer subsidy bill is likely to exceed 3 trillion rupees ($31 billion) in the current fiscal year, well above the budgeted 1.71 trillion rupees, according to a government official familiar with the matter.
