Subject: Agriculture

Introduction

India’s fertiliser subsidy, the second-largest subsidy after food, has expanded rapidly due to rising global energy prices, import dependence, and skewed pricing policies. In 2024-25, the subsidy is estimated to touch nearly ₹2 lakh crore, with projections of ₹2.5 lakh crore in FY26. The article argues not for withdrawal, but for reorientation of subsidies to correct price signals, improve nutrient balance, and enhance productivity while protecting farmers’ incomes.

Why Fertiliser Subsidy Reform Is Back in Focus

1. Fiscal Expansion: Fertiliser subsidy projected at ~₹2.5 lakh crore in FY26, compared to ₹1.37 lakh crore allocated to agriculture and farmers’ welfare.
2. Policy Asymmetry: Urea prices remain fixed and among the cheapest globally, while DAP and MOP prices are decontrolled.
3. Macroeconomic Risk: Heavy import dependence, ~78% for natural gas, ~90% for phosphatic fertilisers, and near-total dependence for potash, exposes India to global commodity shocks.
4. Structural Distortion: Price controls undercut the Nutrient-Based Subsidy (NBS) regime introduced in 2010.
5. Reform Window: Stable growth and low inflation provide a favourable macroeconomic context for politically difficult reforms.

How Price Controls Have Distorted Nutrient Use

1. Urea Price Fixation: Urea sold at a fixed price of ~₹242 per 45-kg bag encourages excessive nitrogen use.
2. NBS Design Flaw: Subsidy linked to nutrient content for P and K, but not applied uniformly to urea.
3. Skewed Consumption: Farmers over-apply nitrogen while under-applying phosphorus and potassium.
4. N:P:K Ratio Collapse: National ratio deteriorated to ~10.9:4:1 against the recommended 4:2:1.
5. State-Level Distortion: Punjab applies ~61% more nitrogen than recommended, underuses potassium by ~89%, and phosphorus by ~8%.

What Data Reveal About Productivity Outcomes

1. China Comparison:
   1. Fertiliser use: ~373 kg/ha (China) vs ~182 kg/ha (India).
   2. N:P:K ratio: ~2.6:1.1:1 (China) vs ~10.9:4:1 (India).
   3. Agri-GVA: ~$1.27 trillion (China) vs ~$0.63 trillion (India).
2. Land Productivity Gap: China generates double India’s agri-GVA despite similar cropped area.
3. Yield Plateauing: Excess nitrogen creates “lush green fields” but fails to increase yields or grain quality.
4. Soil Degradation: Imbalanced nutrient use reduces soil organic carbon and long-term productivity.

Why Nutrient Use Efficiency Remains Low

1. Low NUE Levels: Estimated at only 35-40%, indicating large nutrient losses.
2. Atmospheric Losses: Nitrogen escapes as nitrous oxide, a greenhouse gas ~278 times more potent than CO₂.
3. Water Pollution: Nitrate leaching contaminates groundwater, making it non-potable.
4. Diversion and Leakage: ~20-25% of subsidised urea diverted to non-agricultural uses or smuggled across borders.
5. Declining Response Ratio: Fertiliser-to-grain response ratio fell from ~1:10 (1970s) to ~1:2.7 (2015).

What Policy Design Lessons Emerge from China

1. Per-Unit Land Subsidy: Direct input subsidy on a per-mu basis rather than product-based price control.
2. Market-Determined Prices: Fertiliser prices allowed to reflect market conditions.
3. Innovation Incentives: Over 60% fertiliser consumption through complex fertilisers.
4. Integrated Nutrient Management: Policy steers farmers toward balanced nutrient application.
5. Outcome: Higher productivity with better nutrient balance despite higher fertilizer intensity.

What Reform Pathways Does the Article Propose

1. Gradual Price Decontrol: Phased dismantling of urea price controls.
2. Direct Income Support: Protects farmers through equivalent cash transfers.
3. NBS Recalibration: Reduce nitrogen subsidy while increasing support for phosphorus and potassium.
4. Micronutrient Promotion: Encourages customised blends and soluble fertilisers through fertigation.
5. Data Integration: Identification of tenant farmers using PM-KISAN data, land records, satellite imagery, and fertiliser sales.

What Are the Expected Gains from Reform

1. Fiscal Savings: Estimated annual savings of ~₹40,000 crore.
2. Resource Reallocation: Redirects funds toward agri-R&D, irrigation, and high-value agriculture.
3. Income Enhancement: Precision farming and balanced nutrients improve yield quality and farm profitability.
4. Environmental Protection: Reduces greenhouse emissions and groundwater contamination.
5. Growth Multiplier: Higher rural incomes stimulate demand for manufactured goods.

Conclusion

Reforming the fertiliser subsidy regime is not a question of fiscal retrenchment but of policy correction. By restoring price signals, improving nutrient balance, and protecting farmers through direct support, India can convert a distortionary subsidy into a productivity-enhancing instrument. The challenge is political, but the rewards are structural and long-term.

PYQ Relevance

[UPSC 2014] What are the different types of agriculture subsidies given to farmers at the national and at state levels? Critically analyse the agricultural subsidy regime with reference to the distortions created by it.

Linkage: The question is directly relevant as it focuses on agricultural subsidies and the distortions arising from their design, a core GS III issue. The article offers concrete evidence of how fertiliser price controls create nutrient imbalance, fiscal stress, and environmental damage, strengthening the critical analysis required in this question.

 

Introduction

Gujarat’s cotton farmers are facing acute agrarian distress due to unprecedented rainfall, a sudden collapse in cotton prices, stagnant government procurement mechanisms, and the Union government’s decision to allow duty-free cotton imports. The crisis highlights deep structural vulnerabilities in India’s cotton economy, dependency on global markets, weak domestic safety nets, and uncertain price stabilisation mechanisms.

Why in the news

Cotton-growing districts of Gujarat have reported six farmer suicides within one month after heavy October rainfall drastically damaged crops and market prices crashed. This collapse is occurring despite cotton prices having remained high for nearly a decade. This marked a sharp reversal from the earlier trend of price stability and strong export demand.

Why are cotton farmers in Gujarat facing acute distress?

1. Heavy rainfall damage: Destroyed standing crops, especially in Saurashtra, forcing farmers like Dhanabhai and Bharatbhai to re-borrow for harvesting, labour, and picking.
2. Sudden price crash: Prices dropped to ₹7,200-₹8,200 per quintal, down from last season’s ₹10,000-₹11,000, while input costs (seeds, pesticides, diesel) remain high.
3. High production cost burden: Farmers reported spending close to ₹60,000 per hectare, but market prices provide no recovery of investment.
4. Delayed government compensation: Farmers received little to no compensation for rain-damaged cotton; most remain outside the formal support system.
5. Psychological stress: Multiple farmer suicides recorded; families cite inability to repay loans and the shock of unexpected price fall.

How have policy decisions worsened the crisis?

1. Duty-free cotton imports: Farmers argue that allowing imports when domestic arrival begins pushes prices further down.
2. Reduced import duty from 5% to zero: Facilitated cheaper imports from countries like US, Brazil, Egypt.
3. Timing mismatch: Import duty removal announced just before domestic arrivals, undermining farm-gate prices.
4. Procurement failure: The MSP of ₹7,750 remains non-functional because ginning mills and traders offer lower prices; many farmers cannot access MSP procurement centres.
5. GST on ginning industry: Ginning mills flagged 5% GST on textile waste (cotton seed oil cake and kapasiya) as an additional economic burden.

How are market dynamics affecting farmers?

1. Export slowdown: India is no longer the world’s top cotton exporter; Bangladesh, Vietnam, Pakistan, and Indonesia have cheaper alternatives.
2. High transportation costs: Freight charges and rising diesel prices raise processing and movement costs.
3. Shift in domestic consumption patterns: Mills increasingly depend on cheaper imported cotton, weakening domestic procurement.
4. Quality concerns: Heavy rain reduced cotton quality, lowering demand from ginning mills.
5. Ginners’ risks: Ginners avoid MSP procurement because they must sell at a loss in the global market.

What are farmers demanding from the government?

1. Immediate ban on cotton imports to stabilise domestic prices.
2. Higher MSP operations at the farm gate so farmers don’t bear transportation costs.
3. Real-time procurement centres within villages.
4. Compensation for rain-damaged crops through central or state intervention.
5. Market intervention scheme similar to groundnut and mustard procurement to ensure price stabilisation.

How are traders and mill owners responding to the crisis?

1. Ginners demand revival packages: They seek reduced GST and logistics support.
2. Push for long-term cotton policy: Industry requests structural support to modernise ginning infrastructure.
3. Preference for imported cotton: Imported cotton considered more consistent in quality, impacting local demand.
4. Call for farm-to-mill ecosystem: Mills argue for direct purchase systems that reduce intermediaries.

Conclusion

The cotton crisis in Gujarat reveals a deeper structural challenge in India’s agricultural economy, policy unpredictability, global price sensitivity, inadequate MSP operations, and climate-driven crop volatility. Without strong procurement support, import regulation, and farmer-centric institutional mechanisms, cotton farmers remain exposed to extreme price fluctuations and rising indebtedness. Sustainable stabilisation of the cotton economy requires coordinated action across trade, agriculture, and industry.

PYQ Relevance

[UPSC 2017] What are the major reasons for declining rice and wheat yield in the cropping system? How crop diversification is helpful to stabilise the yield of the crops in the system?

Linkage: The question links to the article’s theme of monocropping-led vulnerability, as seen in cotton farmers’ distress. It reinforces how diversification stabilises yields and incomes when single-crop systems fail.