Reform Express and the Farm Economy: Why Food and Fertiliser Subsidies Are the Real Test for Modi 3.0

Prime Minister Narendra Modi has described his government as being in “Reform Express” mode. Recent moves—ranging from income-tax changes and GST rationalisation to labour reforms, tweaks in the job guarantee scheme, and new free trade agreements—have reinforced this claim. A tariff shock from the US under President Donald Trump has further nudged the government towards long-pending reforms, with early macroeconomic indicators looking encouraging. Advance estimates peg India’s GDP growth at 7.4% in 2025–26, while consumer inflation fell sharply to 1.3% in December 2025.

Yet, the real question is whether this momentum can be sustained into FY27, especially as uncertainty over a trade deal with the US persists. Much will depend on how boldly the government tackles structural bottlenecks—particularly in agriculture and food policy, an area where reforms have long been deferred.

Why agriculture is the weak link in the growth story

While headline growth numbers are strong, agriculture tells a different story. Agri-GDP growth is expected to slow to around 3.1% in FY26, down from 4.6% in FY25. Ironically, the sharp fall in food prices—often celebrated for keeping inflation low—has been a major contributor to this slowdown.

In December 2025, onion prices were nearly 48% lower than a year earlier, potato prices fell by 35%, and most pulses were selling 10–30% below their minimum support prices (MSPs). For consumers, this translated into low inflation; for farmers, it meant distress. In such a price environment, the government’s stated goal of “atmanirbharta” (self-sufficiency) in pulses appears unattainable, even with targeted missions.

The deeper distortion: crop bias driven by subsidies

India’s incentive structure in agriculture remains heavily skewed towards water- and fertiliser-intensive crops such as rice, wheat and sugarcane. This bias is not accidental. It flows from a combination of free or highly subsidised power, cheap urea, and open-ended procurement in several states.

As a result, farmers face weak incentives to diversify into pulses, oilseeds or horticulture—precisely the crops India needs more of, both nutritionally and environmentally. Without crop-neutral incentives, price crashes in non-cereal crops will continue to undermine farm incomes.

Food subsidy: large, leaky and politically comfortable

If “Reform Express” is to mean more than rhetoric, the Union Budget must confront two elephants in the room: food and fertiliser subsidies. The food subsidy alone is expected to touch about ₹2.25 trillion in a total budget of roughly ₹51 trillion.

This subsidy reflects the gap between the economic cost incurred by the Food Corporation of India—around ₹42 per kg for rice and ₹30 per kg for wheat—and what beneficiaries pay under the public distribution system (PDS). Under the PM Garib Kalyan Yojana, about 813 million people—nearly 56% of India’s population—receive 5 kg of free rice or wheat every month.

To its credit, the Modi government introduced point-of-sale machines in over five lakh fair price shops, sharply reducing leakages. But the scale of coverage raises a fundamental question: is it rational to give free food to over half the population when, by World Bank estimates, extreme poverty in India had fallen to around 5.3% by 2022?

From welfare to revdi? Rethinking free food

Even using a higher poverty line, only about a quarter of India’s population qualifies as poor. From this perspective, universal free food for 56% of citizens risks becoming a blunt political dole rather than a targeted safety net. The irony is stark: rice farmers sell their produce to the government and then receive free rice back through PDS—at a higher economic cost to the exchequer.

A more rational path would be to gradually reduce coverage—from 56% to 40%, then to 25%, and eventually to around 15%—while protecting the “antyodaya” (poorest of the poor). Alternatively, the government could shift to direct cash transfers for rice and wheat producers and redesign at least 20% of fair price shops as nutrition hubs offering pulses, oils, milk, eggs, fruits and vegetables, with coupons to encourage dietary diversification.

Fertiliser subsidy: subsidising inefficiency and pollution

The fertiliser subsidy, at nearly ₹2 trillion, is the second-largest subsidy in the Union Budget—larger than the entire allocation for the Ministry of Agriculture and Farmers’ Welfare. Excessive subsidisation of urea has distorted nutrient use, leading to soil degradation, groundwater contamination and higher greenhouse gas emissions. An estimated 20–25% of subsidised fertiliser also leaks out of the system.

The long-term solution lies in decontrolling fertiliser prices and shifting to direct cash transfers to farmers. Short of that, bringing urea under the nutrient-based subsidy regime—on par with DAP and MOP—would be a meaningful first step. Transferring the fertiliser subsidy from the Department of Fertilisers to the Agriculture Ministry could also improve accountability and alignment with farm-level realities.

The real reform test ahead

Merging food and fertiliser subsidies with an expanded PM-Kisan-style direct income support framework would mark a genuine shift from price distortion to income support. It would also free farmers to respond to market signals rather than policy-induced incentives.

If the Modi government is serious about sustaining high growth beyond FY26, agriculture cannot remain the blind spot. Reforming food and fertiliser subsidies is politically difficult—but that is precisely why they are the true test of whether “Reform Express” stays on track or slows at the first major junction.