Urea Subsidy Scheme

Urea is the most used fertiliser in India. It is a white, grainy chemical that gives plants nitrogen, the nutrient that makes leaves green and helps crops grow fast. The government fixes a very low price for urea by law and pays the companies the rest of its cost. This arrangement is called the Urea Subsidy Scheme, and it is one of the biggest subsidies in the Union Budget.

What exactly is urea?

Urea contains about 46% nitrogen, which is the highest nitrogen content of any common solid fertiliser. It is made in factories from ammonia and carbon dioxide. The ammonia itself is mostly made from natural gas. So when the price of natural gas or imported urea goes up in the world market, the cost of making or buying urea in India also goes up.

In 2022-23, urea made up about 36 million tonnes out of a total of about 64 million tonnes of fertilisers used in India, that is, more than half.

Why does the subsidy exist?

Most Indian farmers have small plots and little cash. If they had to pay the full cost of urea, many would use too little of it, and crop yields would fall. Lower yields would mean less food grain, higher food prices and lower farm incomes. Since the Green Revolution of the 1960s, cheap fertiliser has been seen as a key support for India's food security. The subsidy keeps urea affordable no matter how much world prices jump.

Where did it come from?

The urea subsidy system has changed many times:

• Essential Commodities Act, 1955 and Fertiliser (Control) Order, 1985: Fertiliser is declared an "essential commodity". The Fertiliser (Control) Order, made under this Act, lets the government fix the maximum price at which fertiliser is sold to farmers. Since 1973, the movement and distribution of urea has also been controlled under this Act.
• Retention Price Scheme (RPS), 1 November 1977 to 31 March 2003: Each urea factory was given its own "retention price", based on its costs, with a 12% post-tax return on net worth. The government paid each plant the gap between this price and the farm price. Critics said this rewarded high-cost, inefficient plants.
• New Pricing Scheme (NPS), from 1 April 2003: Plants were grouped (six groups based on age and the fuel they use), and subsidy was fixed per group, not per plant. This pushed plants to become more efficient.
• Decontrol of other fertilisers, 1992: Phosphatic and potassic fertilisers were freed from price control in August 1992, but urea stayed under control. This is why urea is still treated differently from all other fertilisers today.
• New Urea Policy (NUP), 2015: Notified on 25 May 2015, it aimed to maximise urea production in India, make plants use less energy per tonne, and reduce the subsidy burden. It set stricter energy-use norms for plants.
• Neem coating, 2015: The government made it compulsory to coat subsidised urea with neem oil. This is explained in detail below.
• Smaller bag, 1 March 2018: The bag size was reduced from 50 kg to 45 kg to nudge farmers to use less urea. The price per kilogram stayed the same, so a 45-kg bag costs ₹242.

How does the subsidy work, step by step?

Think of it like a ration shop where the government pays most of the bill.

1. A company makes urea in India, or a state-backed trading firm imports it.
2. The urea reaches a retail shop near the farmer. The full cost of making or importing it, including transport, is called the delivered cost.
3. The farmer pays only the fixed MRP of ₹242 per 45-kg bag (plus neem-coating charges and taxes).
4. The government pays the company the difference between the delivered cost and the money the company gets from the sale. This difference is the subsidy.

So the subsidy does not go into the farmer's bank account as cash. It goes to the company, and the farmer benefits by paying a lower price at the shop. When world prices rise, the MRP does not change; only the subsidy grows. According to official figures, the actual cost of a bag has been around ₹2,200 in normal times, and it can go much higher during global price shocks.

How is the sale tracked?

Since 2016-17, the government has used a system called DBT in Fertilisers. It started as a pilot in 19 districts and was rolled out in all states and Union Territories between September 2017 and March 2018. Every retail shop has a Point of Sale (PoS) machine. The buyer is identified through Aadhaar, a Kisan Credit Card or a voter ID. The company gets 100% of its subsidy only for the urea actually sold to buyers through these machines. Sales are monitored online through the Integrated Fertiliser Management System (iFMS). This reduces fake sales on paper.

Why is urea coated with neem?

Cheap urea was often secretly diverted to factories that make plywood, glue, plastics and cattle feed, because they could buy it at the low farm price. Coating urea with neem oil makes it bitter and unsuitable for industrial use, so diversion becomes harder. Neem coating also makes urea release its nitrogen more slowly in the soil. This means plants can use more of it before it is lost, so farmers may need a little less.

Gas pooling

Urea plants get natural gas from different sources at different prices. Under gas pooling (since 2015), the gas going to urea plants is mixed in a common pool and supplied at one uniform price. This makes all plants compete on equal terms.

Key numbers to remember

• MRP: ₹242 per 45-kg bag, excluding neem-coating charges and taxes; unchanged since 1 March 2018.
• Domestic production is about 30 to 31 million tonnes a year. Imports range from about 6 to 10 million tonnes a year, depending on stocks and demand.
• Budget: the Department of Fertilisers got ₹1.71 lakh crore in the 2026-27 Budget Estimate. The 2025-26 Revised Estimate was ₹1.86 lakh crore. Urea alone accounts for most of this; about ₹1.17 lakh crore was set aside for urea in 2026-27.
• Nodal body: Department of Fertilisers, Ministry of Chemicals and Fertilisers.

Related government initiatives

• One Nation One Fertiliser (2022): Under the Pradhan Mantri Bhartiya Jan Urvarak Pariyojana, all subsidised fertiliser is sold under a single brand name, "Bharat" (Bharat Urea, Bharat DAP, and so on), whichever company makes it. This stops companies from spending on brand wars and cuts cross-transport of the same product.
• Nano urea (2021): IFFCO, a cooperative, launched liquid nano urea in June 2021. The company claims that a 500 ml bottle can replace at least one 45-kg bag. Field results have been mixed, and its effectiveness is still debated.
• PM-PRANAM (2023): Approved in June 2023. If a state reduces its use of chemical fertilisers, 50% of the subsidy saved is given back to that state as a grant. Of this grant, 70% is for assets linked to alternative fertilisers and 30% for rewarding farmers, panchayats and others who help reduce use.

Commonly confused concepts

• Urea subsidy vs Nutrient Based Subsidy (NBS): Urea's price is fixed by the government (statutory MRP), and the subsidy changes with cost. For phosphatic and potassic fertilisers like DAP, the subsidy per kg of nutrient is fixed, and companies set the price. Urea is outside the NBS scheme.
• Delivered cost vs MRP: Delivered cost is what it really costs to bring urea to the shop. MRP is what the farmer pays. The subsidy is the gap.
• DBT in Fertilisers vs PM-KISAN: In fertiliser DBT, money goes to the company after a verified sale. In PM-KISAN, ₹6,000 a year goes directly in cash to the farmer's bank account.
• Neem-coated urea vs nano urea: Neem-coated urea is ordinary granular urea with a neem oil coating. Nano urea is a liquid made of tiny particles that is sprayed on leaves.

Issues, criticism and the way forward

• Overuse and soil damage: Because urea is so much cheaper than other fertilisers, farmers use too much of it. The recommended ratio of nitrogen, phosphorus and potassium (N:P:K) is 4:2:1. In 2023-24, India's actual ratio was about 10.9:4.1:1. Too much nitrogen harms soil health, lowers the soil's natural fertility, pollutes groundwater with nitrates and releases nitrous oxide, a strong greenhouse gas.
• Heavy fiscal burden: The subsidy bill rises sharply whenever world gas or urea prices jump, which makes budgeting hard.
• Import dependence: India still imports part of its urea and much of the gas used to make it, so it is exposed to global shocks.
• Diversion and smuggling: Despite neem coating and PoS machines, some urea is still diverted to industry or smuggled to neighbouring countries where prices are higher.
• Way forward: The Economic Survey 2025-26 suggested gradually raising the urea price and giving farmers direct cash support instead, so that they choose fertilisers more carefully. Other suggestions include bringing urea under the NBS system, promoting soil-test-based use through Soil Health Cards, expanding organic and natural farming, building more efficient domestic plants, and improving the reach of alternatives like nano fertilisers once their results are proven.

Concepts to Know

• Subsidy: Money the government spends so that people can buy something below its real cost.
• Maximum Retail Price (MRP): The highest price at which a product can be sold to the buyer. For urea, the government fixes it by law.
• Ammonia: A gas made of nitrogen and hydrogen. It is the basic raw material for urea and most nitrogen fertilisers.
• Diversion: When a subsidised product meant for one group (farmers) is secretly sold to another group (factories) for profit.
• Point of Sale (PoS) machine: A small electronic device at a shop that records each sale and checks the buyer's identity.
• Fiscal burden: The pressure on the government's budget from a large expense.
• Nitrous oxide: A gas released when soil bacteria break down extra nitrogen fertiliser. It traps heat in the atmosphere far more strongly than carbon dioxide.