India's fiscal strategy is facing a perfect storm as the escalating Israel-US-Iran conflict drives up the cost of both imported fertilisers and domestic production. This creates a difficult dilemma for the government: it must absorb the rising price gap to prevent a surge in food inflation, even if it threatens the country’s carefully planned fiscal targets.

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The fiscal math may have already come under pressure. Finance Minister Nirmala Sitharaman had set an ambitious path for fiscal consolidation in the budget for 2026-27. “In RE (revised estimates) for 2025-26, the fiscal deficit has been estimated at par with BE (budget estimates) of 2025-26 at 4.4% of GDP. In line with the new fiscal prudence path of debt consolidation, the fiscal deficit in BE 2026-27 is estimated to be 4.3% of GDP,” she said.

However, D.K. Srivastava, Chief Policy Advisor at EY, warned that the targets set out by Sitharaman could face significant headwinds. He noted that subsidies for food and petroleum, alongside fertilisers, will likely be “much larger than the budgeted amounts in FY27. The actual amounts would depend on how long the West Asian crisis lasts and what the Indian crude basket prices are. The budget estimates were calculated assuming base prices of $70-75 a barrel. So within just a month or two into the new fiscal year, the government will have to examine the scope of additional subsidies.”

For FY26, the fertiliser subsidy is projected to be 14% above the budget at Rs 1.92 lakh crore and 3% above the revised estimates, driven by elevated di-ammonium phosphate (DAP) and urea imports, said Pushan Sharma, Director, Crisil Intelligence. “This unavoidable fiscal strain—absorbing costs to shield farmers—will widen the deficit or force expenditure reallocations.”

Commitment to Welfare

Despite these pressures, the government has signalled that farmers will not bear the brunt of global price spikes. Referring to the precedent set during the pandemic, Sitharaman said at an event in Mumbai over the weekend, “Didn’t we do that during Covid? When fertiliser prices abroad shot through the roof, we still procured them at those prices and ensured there were no supply disruptions. Above all, prices were not passed on to farmers. Farmers paid the same price as before. We never shifted the burden to them.”

Under the Direct Benefit Transfer (DBT) scheme, the government continues to provide a 100% subsidy to manufacturers based on actual sales to farmers, ensuring retail prices remain stable.

India is the world’s second-largest producer and consumer of fertilisers, but its reliance on global markets is profound. While nominal import figures show specific gaps—20% for urea and 50% for DAP—the "effective" dependence is much higher.

According to a report by ICRIER, after accounting for inputs like LNG (used for urea) and chemicals, India’s supply chain dependence rises to 68-70%. And the government said recently that the Gulf region provides 20-30% of India’s urea and 30% of DAP. Crucially, this region also supplies 50% of India's LNG. Conflict-driven restrictions in the Strait of Hormuz have disrupted container movement, leading to localised shortages and higher freight costs.

A Ballooning Subsidy Bill

The gap between budgeted figures and market reality is widening rapidly.

As per an analysis by PRS Legislative of the demand for grants of the Ministry of Chemicals and Fertilisers, the total fertiliser subsidy for 2025-26 was budgeted at Rs 1.68 lakh crore but was increased by about 11% in the revised estimates to Rs 1.86 lakh crore.

For the current fiscal, Sitharaman has allocated Rs 1.71 lakh crore for total fertiliser subsidy, but by all available indications, the actual numbers for FY26 and the current fiscal could be far higher. Some reports have suggested it could cross the Rs 2 lakh crore mark. The Rs 1.71 lakh crore includes about Rs 1.16 lakh crore as urea subsidy, and the remaining about Rs 54,000 crore for non-urea fertilisers under the nutrient-based subsidy (NBS) regime.

Pushan Sharma, Director, Crisil Intelligence, said the West Asia crisis has triggered a projected 20-25% surge in the FY27 fertiliser subsidy. “Natural gas shortages—exacerbated by the Strait of Hormuz closure—have curtailed domestic urea production by 25% in March 2026. In April, a few players have reported that import prices have nearly doubled to USD 935-959/MT for urea (India imports ~20% of its urea requirement) and similarly, sulphur costs have spiked 50% to USD 630/MT CFR, compounding the burden on complex fertilisers.”

The upcoming kharif 2026 season is already seeing higher requirements. The Cabinet recently approved Nutrient-Based Subsidy (NBS) rates for the season with an increase of Rs 4,317 crore over the previous year. An official statement noted that “The tentative budgetary requirement for Kharif season 2026 would be approximately Rs 41,533.81 crore. This is approximately Rs 4,317 crore more than the budgetary requirement for the Kharif 2025 season. The budget for Kharif 2025 was Rs 37,216.15 crore.”

Market Reality vs Domestic Production

The price of essential nutrients has seen a sharp year-on-year climb as of March this year. According to data from the ministry, urea prices had risen by 20% year on year, DAP was up by over 10%, and MOP prices were up by 23%. Since March, there has been further price escalation, with reports suggesting urea prices have nearly doubled.

While the government has successfully boosted domestic urea production by 12,000–15,000 tonnes per day through increased LNG supplies, the sheer scale of demand—estimated at 390 lakh tonnes for the Kharif 2026 season—means that international market volatility will continue to dictate the health of India's fiscal deficit.

Sharma of Crisil said that the government must secure long-term LNG and raw material contracts to bypass volatile spot markets, accelerate domestic production capacity, aggressively promote efficient alternatives like nano urea and DAP, and optimise the Nutrient-Based Subsidy framework to reduce structural import dependency while ensuring farmer affordability.