Indian Wheat and Rice Sector Policies and the Implications of Reform

During 1998-2002, India experienced record public surpluses of wheat and rice, sharply higher government grain subsidy outlays, and declining per capita consumption of wheat and rice. By 2006, despite continued high subsidies and sluggish domestic consumption, India developed a large wheat deficit because of reduced price incentives, weak yield growth, and rising subsidized consumption. The pronounced market cycles and declining per capita consumption for India’s major food staples are creating pressure for Indian policymakers to adjust longstanding policies. While there has been no political consensus on more fundamental reform, recent policy changes have moved toward better targeting of food subsidies to low-income consumers, decentralization of government operations, and slowed growth in producer price subsidies. Decentralization is likely to reduce government costs with little impact on producers, consumers, or trade. Lower price supports would aid consumers at the cost of producers, and sharply lower government costs. Adoption of a U.S.-style deficiency payment program could maintain producer support with less market distortion and lower cost, but would require devising a viable system to make and monitor farmer payments.