India - reforming farm support policies for grains

Abstract

The objective of this study is to analyze some of the recent reforms proposed in the operation of government buffer stocks and provision of price support to wheat and rice farmers in India. Based on the Indian grain market scenario and the recent policy initiatives this study estimates the potential impacts of reforms in India’s farm support policies on producers, consumers and traders in various regions of the country. The results are based on a multi commodity partial equilibrium simulation model of regional supplies and demands of grains by different economic classes. In particular, the study focuses on the decentralization of procurement of grains by the individual states where the latter are free to fix their minimum support prices for wheat and rice and the purchase of grain for the public distribution system (PDS) is from the open market. The results show that a switch to decentralized PDS and procurement and removal of rice levy leads to a fall in both procurement and buffer stocks of grains. We also consider implications of reducing minimum support prices (MSP) from their current exorbitant levels. Since in a decentralized scenario the PDS requirements are purchased from the open market, costs of operating the PDS tend to go up. But, when the states reduce the MSP from its current high level, these costs go down. This, in fact, results in a fall in market prices leading to higher consumption by all income classes with consequent rise in consumer welfare. Adding across all agents, total surplus from rice and wheat policy reform is positive in net consuming states and negative in major surplus states. But at the aggregate national level, there are net gains. Price support to farmers could also be offered to farmers in the form of cash subsidy or ‘deficiency payment’. That is, farmers are compensated through deficiency payments when market prices fall below an insured price floor. This results in great cost savings to the government (as it no longer needs to undertake storage and physical handling of grains) while at same time benefiting consumers of all economic classes.