If the government is truly in ‘Reform Express’ mode, it should focus on reforming at least two key areas of the Budget.
By Ashok Gulati, Distinguished Professor, ICRIER
Prime Minister Narendra Modi claims his government is on a “Reform Express” track, having implemented several reforms in income tax, GST, rural employment guarantees, free trade agreements, and more. Many of these moves are commendable and, in part, spurred by trade shocks from President Donald Trump, which pushed India to adopt reforms that were long overdue. Early estimates suggest India’s economy could grow at 7.4% in FY26, with consumer inflation dropping to 1.3% in December 2025. But whether this momentum will continue in FY27, especially with uncertainty over a US trade deal, remains unclear and will depend heavily on further domestic reforms.
One sector urgently needing reform is agri-food. Agri-GDP growth is projected to fall to 3.1% in FY26 from 4.6% in FY25. Low consumer inflation is largely due to sharp declines in food prices: onion prices are down 48%, potatoes 35%, and pulses 10–30% below minimum support prices (MSPs). Under such depressed prices, achieving self-sufficiency in pulses seems unlikely without crop-neutral incentives, as current policies heavily favor water- and fertilizer-intensive crops like rice, wheat, and sugarcane. Massive subsidies for power and fertilizers, coupled with open-ended procurement, exacerbate the problem.
If the government is serious about “Reform Express,” it must address at least two Budget items. Food and fertilizer subsidies together account for around 8–8.5% of the Union Budget—Rs 2.25 lakh crore for food and Rs 2 lakh crore for fertilizers—yet operate inefficiently.
Food Subsidy Reform: The PDS currently provides free rice and wheat to 813 million people, covering 56% of India’s population, despite extreme poverty being just 5.3% (or 24% under a higher poverty line). This means many beneficiaries, including rice growers, receive free food unnecessarily. Reform could gradually reduce coverage to 40%, then 25%, and ultimately 15%, or provide direct cash transfers to producers. About 20% of fair price shops could be converted into nutrition hubs offering pulses, milk, eggs, fruits, and vegetables, with beneficiaries using food coupons to access a more balanced diet.
Fertilizer Subsidy Reform: Urea subsidies, the second-largest in the budget, are largely inefficient and environmentally harmful due to overuse and imbalance with other fertilizers. Around 20–25% also leaks away. Solutions include direct cash transfers to farmers, loosening price controls, bringing urea under the Nutrient Based Subsidy, and transferring responsibility for subsidies to the Ministry of Agriculture. Integrating food and fertilizer subsidies with an expanded PM-Kisan scheme could make the government’s reform agenda truly impactful.
