Prime Minister Narendra Modi has described his government as being in “Reform Express” mode. In recent years, reforms in income tax, the Goods and Services Tax, employment schemes, and a series of free trade agreements have signalled a renewed push to improve India’s growth fundamentals. The tariff shock triggered by former US President Donald Trump is widely seen as having nudged the government into accelerating long-pending changes. Early results appear encouraging: advance estimates place GDP growth at 7.4 per cent in FY26, while consumer inflation fell sharply to 1.3 per cent in December 2025.
Yet the real test lies ahead. With uncertainty over a trade deal with the United States and slowing momentum in agriculture, sustaining this performance into FY27 will depend on how boldly the government addresses structural weaknesses—especially in the agri-food system.
Why agriculture remains the weak link
Agriculture continues to underperform relative to the rest of the economy. Agri-GDP growth is projected at just 3.1 per cent in FY26, down from 4.6 per cent in FY25. Ironically, the sharp fall in food prices has been a key driver of low inflation. Onion prices declined by nearly half year-on-year in December, potato prices fell by over a third, and most pulses are selling well below their minimum support prices.
While this benefits consumers, it has pushed farmers into distress. In such a depressed price environment, achieving self-sufficiency in pulses and oilseeds becomes unrealistic, despite dedicated government missions. The deeper issue lies in India’s incentive structure, which remains heavily skewed towards water- and fertiliser-intensive crops such as rice, wheat and sugarcane.
The subsidy architecture and distorted incentives
This skew is a direct outcome of massive subsidies provided by both the Centre and states. Free or highly subsidised electricity, cheap fertilisers—particularly urea—and open-ended procurement have entrenched monocropping patterns in several regions. These policies not only strain fiscal resources but also damage soil health, groundwater levels and crop diversification goals.
If the government is serious about reform, two large items in the Union Budget demand urgent attention: the food subsidy and the fertiliser subsidy.
Food subsidy: scale, cost and contradictions
The food subsidy is expected to touch about ₹2.25 trillion in FY26. It represents the gap between the economic cost of procuring, storing and distributing rice and wheat by the and the negligible amount recovered from beneficiaries under the public distribution system.
The government currently provides 5 kg of free rice or wheat per month to around 813 million people under the PM Garib Kalyan Yojana, covering nearly 56 per cent of India’s population. While the introduction of point-of-sale machines at over five lakh fair price shops has reduced leakages, the scale of coverage raises fundamental questions.
By international poverty benchmarks, extreme poverty in India has fallen to single digits, even though a broader vulnerability remains. From this perspective, universalised free food for over half the population appears fiscally inefficient and economically irrational. The contradiction is stark: rice growers sell their produce to the government and then receive free rice through the PDS, with rising economic costs borne by the exchequer.
Reforming food support without harming the poor
A gradual and politically calibrated reform is possible. Coverage under free food could be reduced in phases—from about 56 per cent to 40 per cent, then to 25 per cent, and eventually closer to 15 per cent—while protecting the poorest households under Antyodaya provisions. Alternatively, direct cash transfers to farmers producing rice and wheat could replace implicit price distortions.
Another reform avenue lies in nutrition. Converting a portion of fair price shops into nutrition hubs offering pulses, edible oils, milk, eggs, fruits and vegetables would align food security with nutritional security. Food coupons rather than uniform grain entitlements could encourage dietary diversification.
Fertiliser subsidy: fiscal burden and ecological cost
The fertiliser subsidy, projected at nearly ₹2 trillion, is the second-largest subsidy item and exceeds the entire budget of the Ministry of Agriculture and Farmers’ Welfare. Excessive subsidisation of urea has led to imbalanced fertiliser use, contaminating groundwater and increasing greenhouse gas emissions. Leakages and diversion account for a significant share of the subsidy.
The long-term solution lies in decontrolling fertiliser prices and shifting to direct cash transfers to farmers. In the interim, bringing urea under the nutrient-based subsidy regime—placing it on par with phosphatic and potassic fertilisers—would reduce distortions. Shifting the administration of fertiliser subsidies to the agriculture ministry could also improve alignment with farmers’ needs.
Linking subsidies to income support
A more coherent reform would involve merging food and fertiliser subsidies with an expanded income support programme for farmers. Such an approach would move India away from price and input distortions towards direct support, improving efficiency while preserving social protection.
Why these reforms matter for growth
Without restructuring agri-food subsidies, India risks locking itself into low farm productivity, fiscal stress and environmental degradation. Reforming these systems would not only improve farmer incomes but also free resources for investment in infrastructure, health and education—critical for sustaining high growth beyond FY26.
What to note for Prelims
- Agriculture growth in FY26 is projected at around 3.1 per cent.
- Food and fertiliser subsidies together account for about 8–8.5 per cent of the Union Budget.
- PDS currently covers about 56 per cent of India’s population with free food grains.
What to note for Mains
- How subsidy structures distort cropping patterns and resource use.
- Trade-offs between food security, fiscal sustainability and farmer welfare.
- Merits of shifting from price-based subsidies to direct income support.
- Role of agri-food reforms in sustaining long-term economic growth.
