Effectiveness of Auctions in Securing Price Support for Farmers: The Case of a Grain Market in India

This paper reviews rice procurement operations of Government of India from the standpoints of cost of procurement as well as effectiveness in supporting farmers’ incomes. The two channels in use for procuring rice till 2015, were custom milling of rice and levy. In the first, the government bought paddy directly from farmers at the minimum support price (MSP) and got it milled from private millers; while in the second, it purchased rice from private millers at a pre-announced levy price thus providing indirect price support to farmers. Secondary data reveal that levy, despite implying lower cost of procurement was discriminated against till about a decade back and eventually abolished in 2015 in favor of custom milling, better trusted to provide minimum price support. We analyze data from auctions of paddy from a year when levy was still important to investigate its impact on farmers’ revenues. We use semi-nonparametric estimates of millers’ values to simulate farmers’ expected revenues and find these to be rather close to the MSP; a closer analysis shows that bidder competition is critical to this result. Finally, we use our estimates to quantify the impact of change in levy price on farmers’ revenues and use this to discuss ways to revive the levy channel.