India’s grain security policy in the era of high food prices: a computable general equilibrium analysis

There has been a great deal of recent interest in India’s food security, as evidenced by intensive discussions on India’s National Food Security Act (NFSA) and proposed changes to its food subsidy programs. The NFSA is both ambitious and full of potential problems, as it aims at guaranteeing the provision of subsidized food grains for around 70 percent of its vast population and is built upon India’s existing food security policy, which has caused enormous fiscal burden, particularly during the recent world food price crisis. This study uses a computable general equilibrium model to evaluate the fiscal and welfare costs of the market stabilization and insulating food policy of India during the 2007-08 global food crisis. We demonstrate that domestic food grain price stabilization through simultaneously subsidizing consumers and producers and restricting exports entailed huge fiscal costs and equally large welfare costs to India, an outcome that is almost always the worst as compared to the alternative policy mixes examined in this study. While the most market-oriented domestic and trade policy alternatives that would generate better welfare effects and the least fiscal costs may not be feasible due to political economy considerations, we argue that there exist some “middle-ground” policy mixes featuring partial relaxations of domestic subsidizations on either food grains or fertilizers and/or less restrictive border policies. These policy mixes are superior in terms of their welfare effects and fiscal costs and might also be politically possible.