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Paddy cultivation is major part in rural agriculture sector in Sri Lanka. Majority of rural sector paddy farmers are small-scale producers. According to available data paddy production sector provides livelihood opportunities for large numbers of rural population, provide rice requirement of the nation, provide inputs to other industrial sector etc.To enhance small-scale farmers living condition as well as paddy production, Sri Lankan government promotes paddy farmers to use more fertilizer for their paddy cultivation activities. Therefore, Sri Lankan government provides subsidized fertilizer to enhance both paddy production and paddy yield per acre. Last few decades paddy production and paddy yield per acre data show continues increasing trend. At the same time government expenditure on fertilizer also becomes heavy burden to national budget. There are arguments for and against to fertilizer subsidy program and its practice. This study attempts to study the effect of fertilizer subsidy on paddy production and living condition of small-scale farmers in Polonnaruwa district in Sri Lanka. The data are used to estimate an econometric model to find the relationship between paddy productivity, fertilizer subsidy, agricultural infrastructure facilities and farmers education level. The data were collected from Bubula and Raja-elagama villages in Higurakgoda divisional secretariat in Polonnaruwa district. Structured questioner was used to collect the data from 150 farmers. The results show that there is significant relationship between paddy production and dependent variables named fertilizer subsidy, agricultural infrastructure facilities and farmers education level. Especially fertilizer subsidy and paddy productivity is significant at 5 per cent level and R2 was 0.68. This result shows that government main objective of fertilizer subsidy that improves paddy productivity has been fulfilled. At the same time, household income from paddy has also increased and it has affected their livelihoods. But poor agricultural infrastructural facilities have mitigated farmers’ income. Research results and some empirical evidence have concluded that it is important to find alternative methods to select suitable and needy farmers who are eligible to get fertilizer subsidy because conducting methods of distributing have made many kinds of effects on the efficiency of resource utilization, equity of income distribution as well as government budget. Agricultural infrastructure facilities are very important for making fertilizer subsidy programs more meaningful and to have a significant effect on enhancing paddy farmers’ living conditions.

THE EFFECT OF FERTILIZER SUBSIDY ON PADDY PRODUCTION OF SMALL SCALE FARMERS: SPECIAL REFERENCE IN POLONNARUWA DISTRICTIN SRI LANKA