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Fertilisers · PolicyIndia’s Fertiliser Subsidy Regime and the Decarbonisation Transition: Why Rs 1.68 Lakh Crore Creates a Trap and How to Exit It
India’s fertiliser subsidy bill swung from Rs 79,530 crore in FY 2020-21 to Rs 2.25 lakh crore in FY 2022-23 — a tripling in two years — because the MRP of a 45 kg bag of urea has been frozen at Rs 242 since 1 March 2018 while global gas prices moved freely. The government absorbs every rupee of the gap between what it costs to make urea and what farmers pay for it. This architecture makes the fertiliser subsidy effectively a leveraged long position on international LNG prices, held on behalf of 140 million farm households who have no idea they are exposed to it. Under CCTS, urea plants are now obligated entities with mandatory GEI targets. Under CBAM, fertiliser exporters face embedded emission declarations from January 2026. And a new modelling literature is now showing that green urea — produced via electrolysis and renewable electricity — is not just an environmental preference but a fiscal stability tool: its production cost is volatile only in the dimensions the Indian government can actually control. This article maps the full interaction between the subsidy regime and the green transition, from the NBS architecture to the N₂O abatement incentive to the fiscal hedge argument that has not yet entered mainstream Indian policy debate.
India’s fertiliser subsidy for FY 2025-26 is budgeted at Rs 1.68 lakh crore — Rs 1.19 lakh crore for urea under the statutory MRP regime and Rs 49,000 crore as Nutrient Based Subsidy for P&K fertilisers. This is India’s second-largest subsidy expenditure, equivalent to roughly 3% of total Union spending. It has historically been volatile: the actual outgo rose from Rs 79,530 crore in FY 2020-21 to Rs 2.25 lakh crore in FY 2022-23 as global LNG prices spiked. The central mechanism is simple and brutal: the MRP of a 45 kg bag of urea is Rs 242, unchanged since March 2018, while the actual cost of the same bag is approximately Rs 2,200. The government pays every rupee of the Rs 1,958 difference.
Gas accounts for 70 to 80% of the cost of producing urea. India’s 30 gas-based urea plants require 46 to 50 MMSCMD of natural gas daily; domestic allocation covers only 14 to 17 MMSCMD. The balance is met through imported LNG at a pooled price. Every $1 per MMBtu increase in LNG prices adds approximately Rs 1,120 per tonne to the urea subsidy burden — equivalent to roughly Rs 2,800 crore per year in additional government outgo for the domestic production of roughly 25 million tonnes. The West Asia conflict, which has pushed LNG prices sharply higher from February 2026, is the most recent demonstration of this fiscal exposure. India’s fertiliser subsidy bill is, in effect, a pass-through for global gas market volatility — one that the government absorbs invisibly while keeping the farm-gate price steady.
The subsidy architecture creates a perverse incentive for decarbonisation. Urea plants have no financial incentive to reduce the gas intensity of their production — gas cost is passed through to the government as a component of the subsidy calculation, not borne by the plant operator. The New Urea Policy 2015 introduced energy norms that create an efficiency incentive at the margin, but the fundamental pass-through structure means that the larger the gas input, the larger the government subsidy, and the plant’s profit is essentially unchanged. CCTS changes this partially: plants now face mandatory GEI targets and must reduce energy intensity or purchase carbon credits. But the CCTS compliance cost is a new and separate expense on top of the existing subsidy structure — it has not yet replaced the underlying pass-through incentive.
The fiscal hedge argument for green urea has not yet entered mainstream Indian policy debate but deserves direct attention. Modelling published in late 2025 shows that decarbonising India’s urea sector — replacing grey hydrogen from steam methane reforming with green hydrogen from electrolysis — reduces gas demand by up to 96% and water use by 40% by 2050. More immediately, it decouples the production cost from LNG price volatility. During the 2021 to 2023 gas price spike, modelled green urea costs were lower than traded grey urea spot prices for approximately 19 consecutive months. A subsidy regime built on green urea production would be stable rather than volatile — its fiscal risk profile would reflect renewable electricity cost trajectories (which are falling) rather than LNG price trajectories (which are unpredictable and politically destabilising).
The N:P:K ratio distortion embedded in the current subsidy design compounds both the soil health and the decarbonisation problem. The NBS scheme for P&K fertilisers, introduced in 2010, deregulated P&K prices while leaving urea fully price-controlled. The result has been chronic over-application of nitrogen — India’s N:P:K ratio reached 10.9:4.4:1 in FY 2023-24 against a recommended 4:2:1. This overuse of nitrogen generates nitrous oxide emissions at the field level — a greenhouse gas with a global warming potential 273 times that of CO₂ over 100 years — as well as soil degradation and falling fertiliser-to-grain response ratios. Correcting the NPK imbalance is simultaneously a soil health, a fiscal efficiency, and an emissions mitigation objective. The CACP has recommended bringing urea under NBS for years; the political resistance has been consistent.
The subsidy architecture — what it costs, how it works, and why it is so difficult to reform
India’s fertiliser subsidy system is built on a simple and durable political logic: agricultural input prices must not be allowed to vary with global commodity markets, because the farmers who depend on those inputs are both the majority of the electorate and among the most economically vulnerable segments of the population. The corollary of this logic is that the government absorbs all the volatility that farmers do not see. In practice, this means that when international LNG prices triple — as they did between January 2021 and January 2022 — the government’s subsidy bill triples, farmers pay the same Rs 242 for a 45 kg bag, and nobody in the agricultural supply chain has a financial incentive to use less urea or produce it more efficiently.
The mechanics of the urea subsidy are straightforward. The MRP of urea is statutorily fixed by the Government of India at Rs 242 per 45 kg bag — a price that has not changed since 1 March 2018. The actual cost of producing and delivering that bag is approximately Rs 2,200, covering gas feedstock, plant operation, energy, distribution and the freight subsidy to move product to remote locations. The difference — roughly Rs 1,958 per bag, or approximately Rs 43,500 per tonne — is paid by the government to the manufacturer or importer under the DBT system, triggered upon verified PoS-based Aadhaar-authenticated sale to a farmer. The subsidy is not paid until the bag has been sold; this is the essential design of the DBT mechanism that replaced the old pre-DBT advance payment model and substantially reduced leakage.
Fertiliser subsidy trend — the LNG price pass-through in numbers
The chart is stark. In two years — FY 2020-21 to FY 2022-23 — the fertiliser subsidy bill nearly tripled, adding approximately Rs 1.45 lakh crore to the Union government’s expenditure purely because of global gas price movements. No policy decision was taken to spend more; no farmer was made better or worse off. The pass-through was automatic and mandatory. The partial recovery since then reflects the decline in LNG spot prices from the 2022 peak of over $36 per MMBtu to the current pooled price of approximately $15 per MMBtu — still far above the pre-2021 baseline of around $5 to $8 per MMBtu at which the subsidy regime was financially comfortable.
The West Asia conflict, which has disrupted LNG shipments from the Gulf since February 2026, has already pushed global LNG spot prices sharply higher. If the conflict extends and LNG supply from Qatar and its neighbours remains disrupted — India sources approximately 86% of its LNG imports from the West Asia region — the FY 2025-26 actual fertiliser subsidy outgo could exceed the budgeted Rs 1.68 lakh crore materially, repeating the supplementary demand dynamic of FY 2022-23.
Gas price sensitivity — the arithmetic every policymaker should know
IEEFA established the core sensitivity figure clearly: a $1 per MMBtu increase in LNG prices adds approximately Rs 1,120 per tonne to the urea subsidy burden. At India’s domestic production of roughly 25 million tonnes of urea per year, this translates to approximately Rs 2,800 crore in additional annual subsidy expenditure for each dollar of LNG price increase. The table below maps this sensitivity across plausible LNG price scenarios.
The table illustrates why India’s Finance Ministry watches global LNG spot prices as attentively as it watches the monsoon. A return to 2022-level gas prices — entirely plausible given the current West Asia conflict trajectory — would add Rs 60,000 to 80,000 crore to the urea subsidy bill alone, requiring either supplementary budget allocations or subsidy payment delays that have historically strained the working capital of fertiliser companies and disrupted distribution ahead of the sowing season.
India’s 30 gas-based urea plants collectively require 46 to 50 MMSCMD of natural gas per day. Domestic gas allocation to the fertiliser sector covers only 14 to 17 MMSCMD — roughly a third of requirement. The balance is met through imported LNG, delivered at a pooled price that blends domestic gas and import costs. The pooled price mechanism insulates individual plant operators from the full spot LNG price — the government absorbs the difference between the pooled price and the import cost — but it means that every incremental tonne of urea production above the volume supportable by domestic gas allocation adds LNG import dependence at the margin. India’s domestic gas production has been growing — the KG basin and the Cauvery basin have added volumes — but the gap to fertiliser sector requirements has not closed. New urea capacity, including the plants commissioned in Ramagundam, Gorakhpur, Sindri and Barauni, has increased self-sufficiency in manufactured urea but also increased LNG dependence, since the new plants too run on imported LNG at the margin.
The NBS distortion — why the P&K subsidy split made the decarbonisation problem worse
The Nutrient Based Subsidy scheme, introduced on 1 April 2010 for phosphatic and potassic fertilisers, was designed as a rationalisation measure. By providing a fixed per-kilogram subsidy on the nutrient content of P&K fertilisers and deregulating their MRP, the government aimed to move from product-based subsidies toward nutrient-based ones — encouraging companies to compete on product formulation and allowing price signals to encourage balanced use. The reform was sensible in design. Its interaction with the frozen urea MRP regime has been catastrophic for soil health.
When P&K fertiliser prices were deregulated while urea remained at Rs 242 per bag, farmers responded rationally to the price signal: use more of the cheapest input and less of the more expensive ones. India’s N:P:K application ratio, which was close to the recommended 4:2:1 in FY 2009-10, had deteriorated to 10.9:4.4:1 by FY 2023-24. The country applies nearly eleven units of nitrogen for every one unit of potassium — an imbalance that degrades soil organic carbon, promotes the volatilisation of nitrogen as nitrous oxide, and progressively reduces the yield response to all three nutrients. The fertiliser-to-grain response ratio has dropped from approximately 1:10 in the 1970s to roughly 1:2.7 — indicating that India is now applying nearly four times as much fertiliser per unit of grain output as it was during the Green Revolution, and receiving diminishing returns at every margin.
From a greenhouse gas perspective, the NPK imbalance has a direct emission consequence. Nitrous oxide — released when nitrogen fertiliser is applied to soil in excess of crop uptake — is a greenhouse gas with a global warming potential of 273 over a hundred-year horizon, making it the dominant agricultural emission in India’s GHG inventory and a significant contributor to the fertiliser sector’s total carbon footprint beyond the Scope 1 combustion and process emissions of the manufacturing plants themselves. Correcting the NPK imbalance — by rationalising the urea MRP or extending NBS to urea — would simultaneously reduce soil degradation, improve nitrogen use efficiency, lower nitrous oxide field emissions, and reduce the subsidy bill per unit of crop output. The Commission for Agricultural Costs and Prices has recommended bringing urea under NBS repeatedly; successive governments have consistently declined, correctly judging the political risk of even a partial urea price increase as too high relative to the immediate electoral calculus.
The New Urea Policy 2015 — the energy efficiency layer that partially works
The New Urea Policy 2015 introduced a meaningful but bounded efficiency incentive into the subsidy architecture. Under NUP 2015, all gas-based urea plants are divided into three groups based on vintage and technology, with a specific energy norm set for each group. Plants in the same group receive the same subsidy regardless of their actual gas consumption — so a plant that achieves lower gas consumption than the group norm keeps the energy saving as additional profit, while a plant that exceeds the norm bears the additional gas cost itself.
This is a genuine decarbonisation incentive within the limits of the technology. Plants that invest in better heat integration, improved reformer efficiency, advanced process controls, or steam system optimisation can reduce their gas consumption per tonne of urea and retain the cost saving as margin. ICRA notes that at current pooled gas prices of approximately $15 per MMBtu, gas cost remains a pass-through for urea players — but higher gas prices increase the absolute value of the energy efficiency incentive, since each unit of gas saved is worth more at higher prices. The perverse corollary is that low gas prices reduce the incentive to become more efficient, while high gas prices — which increase the subsidy burden — also create the strongest efficiency incentive. The system is self-correcting at the margin but structurally incomplete.
The CCTS adds a separate efficiency incentive layer on top of NUP 2015. Under the gazette-notified GEI Target Rules (October 2025), fertiliser plants are obligated entities with mandatory GHG emission intensity targets. Unlike NUP’s energy-efficiency framing, CCTS measures actual GHG emissions — including both process CO₂ from the reforming and synthesis reactions and Scope 2 electricity emissions. A plant that reduces its GEI below target earns tradeable CCCs; one that misses its target must purchase credits or face Environmental Compensation at 2× average CCC market price. The CCTS compliance cost is a new net cost to the plant — it cannot be passed through to the government under the existing subsidy framework — creating a genuine financial incentive to decarbonise that the subsidy pass-through structure did not previously provide.
CBAM and the fertiliser sector — what embedded emission declarations mean for exporters
India exports modest volumes of urea — the country has historically been a net urea importer, though domestic production has grown with the commissioning of six new plants since 2018. The CBAM exposure for India’s fertiliser sector is therefore not primarily a direct export tariff concern but rather an indirect market signal: global urea and ammonia prices are beginning to price in embedded carbon costs as EU-bound trade flows carry CBAM certificates, and India’s grey urea — produced at approximately 2.6 to 3.0 tCO₂e per tonne against the embedded emission profile of green ammonia that could be well below 0.5 tCO₂e per tonne — becomes increasingly price-disadvantaged in premium export markets that price carbon.
For Indian producers of green ammonia explicitly targeting the EU export market — as several companies developing coastal green ammonia projects in Andhra Pradesh and Gujarat are doing — CBAM creates a direct commercial incentive: the CBAM certificate cost avoided on green versus grey ammonia at EU ETS prices of €80 per tCO₂e and an embedded emission differential of approximately 2 to 2.5 tCO₂e per tonne of ammonia translates to approximately €160 to €200 per tonne of ammonia in avoided CBAM cost. This premium substantially closes the current cost gap between green and grey ammonia for export-oriented producers, particularly when combined with the Hydrogen Purchase Obligation blending mandate creating domestic demand and the SIGHT programme subsidy for electrolyser deployment.
A growing body of modelling suggests that replacing grey urea production with green urea — manufactured using green hydrogen from electrolysis powered by renewable electricity — would reduce India’s gas demand for urea production by up to 96% by 2050. The immediate policy implication is less often articulated: green urea production would transform the fertiliser subsidy bill from a fiscal risk to a fiscal constant. At current green hydrogen costs of approximately $4 to $7 per kg, green urea is more expensive than grey urea to produce. But its production cost is insulated from LNG price volatility. If the government subsidises green urea production rather than grey, the subsidy per tonne would be higher initially — but it would not double in two years when Qatar suspends LNG exports. During the 2021 to 2023 gas price spike, modelled green urea costs were lower than traded grey urea spot prices for approximately 19 consecutive months. A subsidy regime built on domestic renewable electricity and electrolysis would have been a net fiscal saver during the worst gas crisis India’s fertiliser sector has experienced. As renewable electricity costs continue to fall and electrolyser costs decline, the crossover point approaches. The Finance Ministry has not yet framed this argument publicly, but the arithmetic supports it: decarbonising urea production is not a cost; it is a hedge.
Grey versus green — the production economics today and the trajectory
The production cost gap between grey and green urea is significant but narrowing. Current green hydrogen costs of $4 to $7 per kg make green urea materially more expensive than grey at today’s gas prices. But two factors compress this gap progressively. First, electrolyser costs have been falling at approximately 15 to 20% per year and are expected to halve again by 2030. Second, solar and wind electricity costs in India — already at Rs 2.50 to 3.50 per kWh for utility-scale — are expected to continue declining. The 2030 target for green hydrogen under India’s National Green Hydrogen Mission is $1 per kg, which would make green urea competitive with grey urea at anything above approximately $10 per MMBtu in LNG prices. At that point, the subsidy calculus reverses: green urea becomes the cheaper option to subsidise.
Many Indian plants are old. Several are more than 30 years old, and at least seven are over 50. The retrofit versus replacement decision facing these plants — not unlike the blast furnace relining decision in steel — is a moment to either extend fossil lock-in or redirect capital toward decarbonised production. The SIGHT programme under the National Green Hydrogen Mission has allocated Rs 14.66 billion (approximately Rs 1,466 crore) to green hydrogen use in the steel sector and has made allocations for the fertiliser sector. Two tenders for green hydrogen supply have been issued by SECI under the SIGHT programme. The scale remains modest relative to the size of India’s grey hydrogen consumption in fertilisers, which the IEEFA estimates at approximately 98% of India’s total grey hydrogen use.
What CCTS actually changes for fertiliser plants — and what it does not
The CCTS designation of fertiliser plants as obligated entities — with GEI targets now gazette-notified for FY 2025-26 and FY 2026-27 — introduces the first mandatory carbon compliance cost that fertiliser plant operators cannot simply pass through to the government. Under the existing subsidy pass-through architecture, gas costs, operating costs and capital costs are all factored into the subsidy calculation. Environmental Compensation under CCTS sits outside this framework: it is an additional cost that the plant bears directly, not recoverable through the subsidy mechanism.
This creates a genuinely new financial incentive for decarbonisation at the plant level, though the first-phase targets are modest. The CEEW analysis of CCTS targets for the fertiliser sector places the required abatement largely within the negative-cost zone of the marginal abatement cost curve — achievable through energy efficiency improvements that save money on gas consumption. The first phase is, essentially, a mandate to do what plants should have done anyway under NUP 2015 energy norms. The second and third phases — if targets are tightened progressively as India’s climate commitments require — will begin to demand investments that exceed the readily available efficiency opportunity, at which point the deeper question of whether to replace grey hydrogen with green becomes financially material.
The N₂O abatement dimension is separately significant. Nitrous oxide emissions from nitric acid plants — a byproduct of the ammonia-to-nitric acid oxidation step used in ammonium nitrate and some NPK production — have been shown to be reducible at very low marginal cost through catalytic decomposition. Under the CCTS voluntary mechanism, N₂O abatement projects at fertiliser plants can generate CCCs — creating a revenue stream that incentivises an abatement technology with a payback of often less than two years. The existing article in this cluster on N₂O abatement maps this mechanism in detail; the subsidy regime interacts with it in that plants that already face thin margins due to the gas pass-through structure and CCTS compliance costs may find N₂O abatement credits a meaningful additional revenue line that justifies the upfront investment.
Frequently Asked Questions
Why has India not brought urea under the NBS scheme as CACP has recommended?
The Commission for Agricultural Costs and Prices has repeatedly recommended extending NBS to urea — which would deregulate the urea MRP, allow companies to set market prices, and pay a fixed per-kilogram nitrogen subsidy rather than covering the full cost gap. The political resistance is intense and bipartisan. India’s 140 million agricultural households, concentrated in the most electorally significant states — Uttar Pradesh, Punjab, Haryana, Bihar, Madhya Pradesh — are direct beneficiaries of a frozen low urea MRP. Any increase in the retail price of urea, even if offset by direct cash transfers, creates visible political exposure during sowing seasons. The 2020-21 farm protest, which led to the repeal of three farm laws, demonstrated the political cost of agricultural policy reforms that are perceived to hurt farm incomes. Urea price reform, however fiscally rational, faces the same political calculus and has not progressed despite recommendations from multiple expert bodies over fifteen years.
What is the CBAM exposure for India’s fertiliser sector?
Fertilisers — specifically ammonia, nitric acid, ammonium nitrate, urea and NPK fertilisers — are among the CBAM-covered goods from January 2026. India is predominantly a net importer of urea rather than an exporter, so the direct CBAM exposure for volumes shipped to the EU is modest. The indirect effect is larger: global urea and ammonia prices are beginning to reflect embedded carbon costs as EU importers factor CBAM certificates into procurement decisions, and Indian producers selling into global spot markets increasingly compete with producers from countries where carbon pricing has already been partially internalised. The commercial incentive for green ammonia production explicitly targeting EU export contracts is direct: at €80 per tCO₂e and an embedded emission differential of 2 to 2.5 tCO₂e per tonne of ammonia, the CBAM-related premium for green over grey ammonia is approximately €160 to €200 per tonne — sufficient to meaningfully close the current green-grey cost gap for export-oriented producers.
Does the fertiliser subsidy system penalise plants that invest in decarbonisation?
Not directly — but it does not reward them either, which is a meaningful constraint. Under the pass-through subsidy architecture, a plant’s operating costs, including gas consumption, are effectively underwritten by the government subsidy mechanism. A plant that invests capital to reduce gas consumption retains the gas saving as efficiency gain under NUP 2015, but the capital investment itself must be borne by the plant and cannot be recovered through the subsidy. Green hydrogen retrofits, carbon capture systems, or new electrolytic ammonia units require capital at rates that the current subsidy margin does not justify on commercial terms. CCTS compliance costs add pressure in the right direction — they create a direct cost for high-GEI operation — but the first-phase targets are modest enough that plants can generally comply through efficiency measures rather than capital-intensive technology change. The policy lever that would change this is either significantly tighter CCTS targets in phase two, a blending mandate under the HPO framework requiring minimum green ammonia content, or a capital subsidy explicitly linked to green hydrogen deployment in urea production.
How does the West Asia conflict affect India’s fertiliser security and subsidy bill?
In three ways simultaneously. First, 86% of India’s LNG imports originate from the West Asia region, primarily Qatar. Any sustained disruption to LNG supply or transit routes raises the pooled gas price for fertiliser plants, directly increasing the urea subsidy burden at the rate of Rs 1,120 per tonne per $1/MMBtu of price increase. Second, India imports approximately 100% of its potash (MOP) requirements and a significant share of its phosphate rock, much of it transiting through West Asia or sourced from the region. The conflict has already pushed DAP prices up by approximately $100 per tonne, adding pressure on the NBS outgo for P&K subsidies. Third, maritime freight disruption — ships rerouting via the Cape of Good Hope rather than the Red Sea — has added shipping costs for all imported fertiliser inputs, which flow through to the subsidy calculation. The government activated priority domestic gas allocation to the fertiliser sector on 10 March 2026, a measure that partially insulates plants from spot LNG price spikes by directing more domestic gas toward fertiliser use. This is the immediate operational response; the structural response — reducing LNG dependence through green hydrogen production — remains a medium-term aspiration rather than a deployed policy.