India's Fertiliser Subsidy: A ₹1.71 Lakh Crore Problem Every Agricultural Lender Should Understand

India's fertiliser subsidy bill for 2026-27 is budgeted at ₹1.71 lakh crore — ₹1.17 lakh crore for urea alone, and ₹54,000 crore for nutrient-based support covering phosphates and potash. The revised estimate for 2025-26 had already overshot the budget at ₹1.86 lakh crore, driven by geopolitical supply disruptions from West Asia. CRISIL has projected a further 20–25% surge in FY27 if global shocks persist.

This is India's second-largest subsidy expenditure, behind only food. It has been growing for a decade. And the fundamental problem is not the cost — it is the design.

The system rewards the wrong behaviour

Urea has been sold at ₹242 for a 45-kg bag since 2018. The price has not moved despite a decade of global energy volatility, rupee depreciation, and supply chain disruptions. Because urea is cheap and DAP is not — DAP continues to be capped at ₹1,350 per bag despite global prices touching $652 per tonne in 2025 — farmers systematically overuse nitrogen and underuse phosphorus and potassium.

India's NPK application ratio now stands at 10.9:4.4:1 against an agronomic ideal of 4:2:1. Soil organic carbon is declining. Fertiliser-to-grain response has collapsed from 1:10 in the 1970s to 1:2.7 today. Nutrient use efficiency is a mere 35–40%.

India imports 25% of its urea, 90% of its phosphates, and 100% of its potash. When global prices spike — as they did in 2022-23, pushing the bill to ₹2.25 lakh crore — the fiscal impact is immediate and non-negotiable.

Where reform is heading

The structural reform direction is not debated among economists: move urea into the Nutrient Based Subsidy framework, shift support to direct farmer income transfers via Jan Dhan-Aadhaar, and let farmers choose their own input mix. The government is already pushing nano urea through three lakh PMKSK centres as a softer route to subsidy reduction.

The 2020-21 farm protests demonstrated how difficult structural reform in agricultural input policy can be. But the fiscal math is increasingly unsustainable. Something will eventually move.

What agricultural lenders are missing

Soil health is a credit variable. A borrower farming degraded, nitrogen-saturated soil in a rainfed district is not the same risk as a borrower farming well-nourished land with irrigation access. Current credit appraisal systems treat them identically.

If subsidy policy shifts toward direct income transfers, the input cost structure for farmers changes. Working capital requirements change. KCC limits calibrated to existing input costs will need recalibration.

And if reforms are delayed and fiscal pressure mounts, the impact finds expression elsewhere — in reduced state spending on rural infrastructure, irrigation, cold chain development, or scheme financing that agricultural lenders have built their portfolio assumptions around.

The fertiliser story is not a policy footnote. For lenders with material agricultural portfolios, it belongs in portfolio risk analysis — not in the agriculture ministry update circulated quarterly by the head office.