New Delhi – India's economy faces a significant threat, according to a stark warning issued by prominent agricultural economist Ashok Gulati and senior fellow Ritika Juneja. In a recent opinion piece, the economists argued that only major structural reforms, akin to those implemented in 1991, can avert a deeper crisis, with an overhaul of the country's extensive fertilizer and food subsidies being paramount.
Economic Pressures Mounting
Gulati and Juneja highlighted several indicators pointing to economic instability. They cautioned that the Indian rupee could fall to Rs 100 against the US dollar if current pressures persist and the Reserve Bank of India (RBI) is forced into heavy intervention to defend the currency. External factors, such as the conflict in West Asia, have driven up India's energy and fertilizer import costs. Concurrently, foreign investors are withdrawing capital, and domestic investment sentiment remains weak.
Under these conditions, the economists project that India would be fortunate to achieve 6% GDP growth and keep Consumer Price Index (CPI) inflation below 6% in the fiscal year 2027. The situation could worsen drastically if critical shipping routes like the Strait of Hormuz face extended closures, potentially pushing GDP growth below 6% and inflation above that mark, forcing the RBI to raise interest rates.
The Fertilizer Subsidy Conundrum
A central focus of their critique is India's fertilizer subsidy regime. The country imports 20-25% of its urea needs, with recent tenders showing a landed cost of approximately $935 per tonne. However, due to heavy subsidies, urea is sold to farmers at less than $70 per tonne, meaning subsidies cover nearly 90% of its cost.
This vast price disparity, the economists contend, creates strong incentives for diversion and smuggling. They cited government data for states like Bihar, showing significant mismatches between fertilizer supplied and actual farm usage. Reports indicate subsidised fertilizers are routinely smuggled into neighboring Nepal and Bangladesh.
The fertilizer subsidy bill, initially budgeted at Rs 1.71 lakh crore for FY27, is now projected to exceed Rs 2.25 lakh crore, potentially reaching Rs 2.50 lakh crore.
Proposed Reforms: DBT and Food Subsidy Rationalization
As a solution, Gulati and Juneja propose replacing the current fertilizer subsidy mechanism with a direct benefit transfer (DBT) system. This system would be linked to land holdings and integrated with the existing PM-Kisan programme. Such a shift, they argue, could significantly reduce leakages, curb smuggling, and save the government an estimated Rs 40,000-50,000 crore annually.
Beyond fertilizer, the economists also questioned the scale of India's food subsidy programme. Despite government estimates indicating a sharp decline in poverty, more than 800 million people continue to receive free foodgrain. Rationalizing the list of beneficiaries or increasing issue prices for those above the poverty line could yield another Rs 50,000 crore in annual savings.
The economists concluded by warning against delaying these politically challenging reforms, asserting that such hesitation would reflect 'policy timidity' rather than caution, ultimately deepening India's economic challenges.