Rice is not only the staple food of Sri Lanka, but also a part and parcel of the rural livelihood of the country. The Government of Sri Lanka has introduced a number of policies and programs to increase paddy production since independence. The fertilizer subsidy program is one of the longest-lasting, most expensive, and most politically sensitive policies implemented to promote rice cultivation in Sri Lanka. It was initiated in 1962 (that is, at the onset of the Green Revolution) with the main objective of encouraging farmers to switch from traditional rice varieties to high-yielding varieties (HYVs) that are highly responsive to chemical fertilizers. Since then, however, the provision of the subsidy has become customary, and successive governments have been under tremendous pressure to continue the subsidy despite budgetary constraints. The subsidy policy has evolved over time. During the period 1962–89 the subsidy was provided for all three main types of fertilizers—nitrogen (N), phosphorus (P), and potassium (K)—targeted primarily at paddy. Subsidies were not provided during 1990-94 but were reintroduced in 1995 for all three types of fertilizers. The subsidy was limited to urea during 1997–2004. Since 2005, the subsidy has again been expanded to cover all three types. The price of a 50-kilogram bag of fertilizer has been set at US$3.07 regardless of the world market price. Paddy farmers are eligible to apply for the fertilizer subsidy provided that they have legal title to their paddy lands.2 The subsidy payment constitutes 2.24 percent of total government expenditures and has become a massive burden on the Treasury. It is widely accepted that the fertilizer subsidy has led to increased land productivity and encouraged farmers to expand the land under paddy cultivation (Central Bank of Sri Lanka, various years). It has, however, resulted in certain policy failures too. Once purchased, fertilizer is also applied to paddy that is cultivated on lands without legal titles as well as to crops other than paddy. Furthermore, the media often report on inefficiencies associated with the distribution of fertilizer by the Agrarian Services Centers (ASCs) of the Ministry of Agricultural Development and Agrarian Services. Certain environmentalists, based on their preliminary findings, have initiated discussions in the public media of the pollution of waterways by heavy metals, such as cadmium, caused by application of inorganic fertilizer. They also argue that accumulation of cadmium in water bodies as well as in plant and animal tissues have led to increased prevalence of chronic renal failures. Paddy cultivation provides livelihood opportunities for more than 1.8 million farmers in the country, and hence the government has been under constant pressure to continue the fertilizer subsidy. Any significant deviation from the status quo could damage the political power base of the ruling party. Your assignment is to propose amendments to the prevailing fertilizer subsidy policy, assuming that the Sri Lankan government will have to make appropriate revisions to the current policy in order to more efficiently and effectively achieve several objectives: (1) support the livelihoods of paddy farmers; (2) achieve national self-sufficiency in rice; (3) reduce the burden on the Treasury; (4) curtail transaction costs and inefficiencies associated with distribution; and (5) minimize environmental pollution due to the overapplication of fertilizer.