India's food grain policies and the public distribution system: The case of rice: who wins, who loses, and by how much?.

Author name: 
Garry Pursell

Indian governments follow highly interventionist policies on food grains, especially rice and wheat. These policies include import and export controls which insulate the domestic market from world markets, a minimum support price (MSP) program which supports and controls domestic wholesale prices, large farm input subsidies, and consumer subsidy programs which provide rice and wheat through about half a million “fair price shops” to low income (below the poverty line‐BPL) consumers at very low controlled prices. The consumer subsidy scheme was implemented under the provisions of the Targeted Public Distribution System (TPDS) until September 2013, when it was replaced by the National Food Security Act (NFSA). The NFSA aims to more than double the distribution of highly subsidised food grains (mainly rice and wheat) to cover approximately two thirds of the Indian population. Using a simple, comparative static linear model of the rice market roughly calibrated to the situation in rice marketing year 2011/12, this paper simulates the effects of various combinations of the following: abolition of the MSP regime, abolition of the TPDS, and opening of the market to exports by the private sector. The simulations identify the winners and losers and quantify the consequences of these policies for the fiscal positions of the central government and state governments, and for the welfare of rice farmers, rice consumers in general, poor (BPL) rice consumers, not‐poor rice consumers, and “diverters” who illegally resell subsidised rice at market prices. The policy simulations indicate that (1) The biggest increase in aggregate welfare is in the simulation which abolishes both the MSP and the TPDS and allows rice exports without restriction subject to an export tax (2) The improvement in aggregate welfare is much larger when the policy simulations include the abolition of the TPDS (3) When the TPDS is abolished, the net aggregate welfare improvement of the winners is more than sufficient to compensate the net welfare losses of BPL rice consumers. Unfortunately the NFSA replicates and in some respects worsens the deficiencies of the TPDS, so the prospect that it will be more effective and less costly in supplying low price food grains to very poor and poor individuals does not look good.

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