Food Grain Policies in India and Their Implications for Stocks and Fiscal Costs: A Partial Equilibrium Analysis

The food market in India is characterised by a high degree of government involvement, especially in two staple food grain markets – rice and wheat. As a result, the private sector is crowded out and the market is shaped by the interplay of the two forces – private and public. The government intervention starts before the planting, when the Minimum Support Price (MSP) is announced. Grains are procured from the farmers (open end procurement) with the guaranteed MSP, which should cover the production costs and a ‘reasonable’ margin for the farmers. The procured grains are stored as buffer stocks (consisting of operational and strategic stocks) which are run by the state. Grains are further distributed to the poor with heavily subsidised prices through the Targeted Public Distribution System (TPDS). The excessive stocks can be released to the market through Open Market Sales Scheme (OMSS) or exported. The open end procurement, high MSP and strong trade limitations result in high public procurement rates . Most of the time, the actual stocks manifold exceed the buffers stock norms and even the country’s storing capacity This in turn results in massive damages of grains. Additionally, the TPDS suffers from huge targeting errors, subsidies are very costly and incompatible with WTO standards. In the light of the rising fiscal costs of the system, its inefficiency and high food inflation, there is a need for finding cost-effective alternatives. Assessment of their costs and benefits is especially important in the wake of all India implementation of the National Food Security Act, 2013, which brings an extension to the current system by the guaranteed provision of heavily subsidised grains to almost 70% of the population. There is also an international pressure on India to reform its food sector due to its impacts on world market prices. Also the recent prorogation of implementation of the WTO Agreement on Agriculture (AoA), which limits support for farmers to 10% of the value of production, is only a temporary solution. Domestically, there are rising voices advocating for introduction of cash transfers instead of TPDS. The current study provides a model for the quantitative assessment of the major food policies on the food sector in India. It is based on a model of the Indian food sector, which encompasses the duality of the system - the coexistence of private and public forces. The model is a two-market (rice and wheat) yearly partial equilibrium model. Functional forms and most of the parameters used in the model are derived from the ex post econometric analysis of the data from 1982 to 2012 . As a result, the model is based on the careful data analysis and in depth study of the system, which makes it a reliable and comprehensible tool for simulations of the implications of different policies. In the model, the two markets interact with each other through their substitution in demand and storage. Computation of the equilibrium prices is formulated as a mixed complementarity problem (MCP) and executed in the generalized algebraic modelling systems (GAMS) software. Quantities procured by the government (with the MSP), closing private stocks, exports, production, demand and fiscal costs are determined endogenously through equations or the complementarity conditions. Interaction between the MSP and the market price determines the amounts procured by the government. Private stocks are driven by total market supply, trade policy and partially crowded out by public stocks. Production strongly and significantly responds to MSP (short-term price elasticity for wheat equal to 0.47 and 0.39 for rice). Rice consumption is influenced by TPDS and wheat demand responds to market prices. Public exports are exogenous and OMSS off-takes are a constant share (10%) of excessive public stocks (stock above norm). World rice prices are endogenous (large country case) and for wheat exogenous. As to our best knowledge this is the first study which captures all the major food policies in India and quantifies their impact on the stocks, prices and fiscal costs. In this study the alternative exogenous policy scenarios are compared with respect to their impact on the domestic prices, public stock levels and related fiscal costs. The particular considered policy options are: • Liberal system: shifting from the MSP to deficiency payments and TPDS towards direct cash transfers, including a liberalization of international trade (relying more on the imports in case of crop failure) • Expanding the TPDS under the NFSA (as mentioned above, increasing the scope of the distribution and lowering the distribution price) within the current system (with open end procurement and holding public stocks) under different trade regimes The simulation model based on the econometric estimation reproduces the basic dual market dynamics well.