Fertiliser Subsidy Burden Set to Double: Hormuz Crisis, Urea Imports & NBS Explained

Affordability for farmers: A fertiliser subsidy is financial support provided by the government so that farmers can buy chemical fertilisers at prices far below their actual cost of production or import. Agriculture supports a large share of India's workforce and is central to national food security, so keeping fertilisers affordable is treated as a strategic and welfare objective rather than a purely commercial one.

Payment goes to companies, benefit goes to farmers: Importantly, the subsidy in India is paid to fertiliser manufacturers and importers, not directly to farmers. The companies sell fertilisers to farmers at government-controlled or government-monitored prices, and the gap between this lower selling price and the higher cost is reimbursed by the Centre as subsidy. The ultimate beneficiary is the farmer, who pays much less than the market rate.

Fiscal weight: The fertiliser subsidy is one of the largest items of government expenditure, second only to the food subsidy. Because a large part of India's fertiliser and its raw materials are imported, the subsidy bill is highly sensitive to global prices, exchange rates and shipping costs, which is exactly why a foreign conflict can suddenly inflate India's domestic budget.

Two separate regimes: India runs two parallel subsidy systems. Urea is governed by the Urea Subsidy Scheme, while non-urea phosphatic and potassic (P&K) fertilisers such as DAP and NPK complexes are governed by the Nutrient Based Subsidy (NBS) Scheme. This split is at the heart of many of India's fertiliser policy problems.

Urea — price controlled: Urea is the only fertiliser whose Maximum Retail Price (MRP) is statutorily fixed and kept uniform across the country. The difference between the delivered cost of urea (at the farm gate) and the controlled price recovered from farmers is paid by the government to the urea manufacturer or importer. Because urea is cheap and tightly controlled, farmers tend to over-apply it.

NBS — fixed subsidy per nutrient: The NBS Scheme was launched on 1 April 2010 for P&K fertilisers. Under it, the government fixes a per-kilogram subsidy on each nutrient — Nitrogen (N), Phosphorus (P), Potassium (K) and Sulphur (S) — and notifies these rates annually or bi-annually. The subsidy is fixed; the MRP is decontrolled and set by companies (subject to government monitoring). The scheme covers more than two dozen grades of P&K fertilisers and was designed to encourage balanced nutrient use rather than blanket product subsidies.

The built-in distortion: Since urea remains cheap and price-controlled while P&K prices move with the market, farmers are pushed towards excessive urea use. This skews the nitrogen-phosphorus-potassium (NPK) balance in the soil away from the agronomically recommended ratio, harming long-term soil health while also concentrating the subsidy on a single nutrient.

A modified Direct Benefit Transfer: Unlike the LPG model, where the consumer's bank account is credited, fertiliser DBT works differently. Farmers continue to buy fertiliser at subsidised prices from retailers, and the company receives the subsidy from the government only after the actual sale is recorded.

Point-of-Sale verification: Each of the lakhs of fertiliser retail outlets is equipped with a Point-of-Sale (PoS) machine linked to the Department of Fertilizers' e-Urvarak DBT portal. At the time of purchase, the buyer's details and biometric or Aadhaar/Kisan Credit Card authentication are captured, and only then is the subsidy released to the company within days.

Purpose: This system was introduced to curb diversion of subsidised fertiliser for industrial use, prevent leakages, generate real-time data on consumption, and stop the old practice of subsidy arrears spilling over into the next financial year.

High import exposure in raw materials: Even where India produces fertiliser domestically, it remains exposed to imports through raw materials. Urea production depends heavily on natural gas (LNG) as feedstock, which makes up the bulk of its production cost. Complex fertilisers depend on imported ammonia, phosphoric acid and sulphur. So even "domestic" production carries a hidden import bill.

Direct import dependence: India is among the world's largest importers of urea and imports a significant share of its DAP requirement, with a large part of this coming from the Gulf region. Saudi Arabia and Oman are among the leading suppliers of DAP and urea respectively, and the Gulf also supplies a major share of India's LNG. This concentration of supply in one geography is the structural vulnerability the current crisis exposed.

(Note on data: India's stated import reliance for urea varies across official and analyst estimates — commonly cited in the range of roughly 13–25% of consumption — because it depends on whether one counts only finished urea or also the imported gas used to make it. The wider supply-chain dependence, after counting feedstock, is estimated to be far higher.)

The chokepoint: The Strait of Hormuz is a narrow waterway between the Persian Gulf and the Arabian Sea, through which a very large share of the world's seaborne energy and fertiliser trade passes. The Persian Gulf accounts for a substantial portion of global seaborne urea, sulphur and ammonia exports. Unlike the 2022 Russia-Ukraine fertiliser shock, Gulf supplies cannot be easily rerouted when the strait is blocked — the cargo is physically trapped behind the chokepoint.

The disruption: Commercial shipping through the strait was severely disrupted from early 2026 amid the escalation involving Iran, Israel and the United States, before the strait was reopened to commercial vessels in mid-April 2026. During the disruption, global urea and DAP prices spiked sharply, domestic urea production was curtailed by gas shortages, and import prices for urea and sulphur rose steeply.

The cascading cost: Higher global prices, costlier feedstock, congested ports and "opportunistic" freight pricing all fed directly into India's subsidy bill, because the government — not the farmer — absorbs the difference. This is how a geopolitical event thousands of kilometres away translates into a near-doubling of a domestic budget line.

Subsidy as a shock absorber: Because India insulates farmers from global price swings through subsidy, the entire shock lands on the exchequer. When the imported cost of urea or DAP nearly doubles, the government's reimbursement obligation rises in step, widening the gap between the Budget Estimate and actual spending.

Pressure on the deficit: A large unbudgeted subsidy outgo can strain the fiscal deficit target, divert resources from capital spending, and force supplementary demands for grants. This is why the doubling of the fertiliser subsidy is significant not just for agriculture but for overall macroeconomic management.

Nutrient imbalance and soil health: The dual regime — cheap controlled urea and market-priced P&K — has skewed India's NPK use ratio heavily towards nitrogen. Over-application of urea degrades soil health, pollutes water bodies and contributes to nitrous oxide emissions, a potent greenhouse gas.

Concentration of supply risk: Heavy reliance on a single region (the Gulf) for both finished fertiliser and feedstock means a localised conflict can threaten national food security inputs, exposing the need for diversification and strategic stocks.

Fiscal unsustainability: Open-ended, price-linked subsidies make the bill unpredictable and difficult to budget, especially in a volatile geopolitical environment.

Diversifying imports: India is pursuing long-term and government-to-government supply arrangements, including exploring Russia and other suppliers, to reduce dependence on the Gulf route and lock in stable prices.

Boosting domestic capacity: New and revived urea plants, expansion of indigenous production, and promotion of nano urea (a liquid alternative aimed at cutting conventional urea use) are intended to reduce import reliance.

Rationalising the subsidy regime: Expert bodies, including the Commission for Agricultural Costs and Prices (CACP), have recommended bringing urea under the NBS framework so that all nutrients are treated uniformly, discouraging the over-use of nitrogen and promoting balanced fertilisation.

Better targeting and balanced use: Linking subsidy and advice to Soil Health Card data, promoting organic and bio-fertilisers, the One Nation One Fertiliser branding (to standardise bagging and ease distribution), and strengthening DBT to plug leakages are part of the longer-term reform agenda.

India needs to balance two competing objectives — protecting farmer affordability and food security on one side, and fiscal prudence on the other. In the near term, securing diversified, long-term contracts for both finished fertilisers and feedstock (LNG, ammonia, phosphoric acid, sulphur), maintaining adequate buffer stocks, and accelerating domestic production can cushion supply shocks. Over the medium term, rationalising the subsidy architecture — including the long-pending proposal to bring urea under the NBS regime — promoting nano urea and balanced fertilisation aligned with Soil Health Cards, and investing in alternatives such as bio and organic fertilisers can reduce both the import dependence and the structural distortion in nutrient use. The current crisis is a reminder that input security is inseparable from food security, and that an open-ended, price-linked subsidy is difficult to sustain in a volatile global environment.