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Indian Wheat and Rice Sector Policies and the Implications
of Reform
Shikha Jha, P.V. Srinivasan, and Maurice Landes
Economic Research Report No. (ERR-41), May 2007
Between 1947, when India achieved independence, and 2000, the
country’s food grain sector turned perennially large deficits
into large surpluses of the major Indian food staples, wheat
and rice. During the 1960s and 1970s, the turnaround was achieved
through rapid gains in yields, combined with policies that balanced
producer and consumer interests. In the 1990s, growth in yields
and consumption slowed and government policy sought to sustain
progress by increasing producer support and improving the targeting
of food subsidies to low-income consumers. By 2000, the Government
faced an unwanted combination of high domestic prices, declining
per capita consumption, record grain surpluses, and soaring
budgetary costs. More recently, in 2006, lower prices, weak
yield growth, and rising subsidized distribution have led to
the reemergence of a substantial wheat deficit.
What Is the Issue?
Weak growth in food grain production and consumption, and pronounced
recent market cycles, have created pressure for reform of India’s
longstanding food grain policies. Because India’s food
grain economy is one of the world’s largest, the path
India eventually takes on food grain policy is likely to have
important implications for U.S. and global markets for wheat
and rice. There has been considerable public debate in India
on the need for changes in agricultural and food grain policy,
but political consensus on major reform has proved difficult
to achieve. This study examines recent developments in India’s
markets and policies for wheat and rice, and analyzes the impacts
of several policy changes already underway or under consideration
to rebalance producer and consumer interests and control budgetary
costs.
What Did the Study Find?
The Indian Government has taken steps to decentralize public
food grain operations in order to reduce budgetary costs and
to improve the targeting of India’s large food subsidy
outlays to low-income consumers. Although there has been no
explicit change in price support policy, wheat and rice support
prices declined in real terms between 2000 and 2006. This study
analyzed potential impacts of three policy reform options that
might be pursued over the next several years:
1. Complete decentralization of government wheat and rice procurement
and distribution
2. Decentralization plus 10- and 20-percent real reductions
in wheat and rice support prices
3. Decentralization plus a shift to use of deficiency payments
rather than government purchases to support wheat and rice producers.
Results indicate that decentralizing procurement from the Central
to the State Governments (option 1) can substantially reduce
government costs with little overall impact on producers, consumers,
or trade. Decentralization may also allow more scope for efficient
private traders to participate and invest in grain marketing.
Changes in price support policy that reduce minimum support
prices for wheat and rice (option 2) would yield larger impacts
on domestic supply and demand than decentralization, as well
as sharply lower budgetary costs. Production and producer welfare
may decline, but these losses are more than offset by gains
in consumption and consumer welfare, particularly among lower
income consumers. Although trade impacts are minor in the scenario
analyzed, lower domestic prices are likely to boost the competitiveness
of Indian exports in years of surplus, while the recovery in
consumption and lower stocks increases the potential for imports
in years of deficit.
Replacing the existing system of supporting producer prices
through government purchases with a U.S.- style deficiency payment
program (option 3) would sharply reduce the budgetary costs
of supporting producers while also reducing market distortion.
However, this option would require development of a viable mechanism
to make payments to producers and thwart corruption. This option
possibly could be based on a recent initiative to create a system
of verifiable and negotiable warehouse receipts.
The major options available to the Indian Government to improve
performance and reduce distortions in the wheat and rice sectors
appear able to deliver significant cost savings and improved
overall welfare. In the medium term, these reforms also may
boost consumption and lower stocks, with increased likelihood
of imports in years of poor harvests, as well as competitive
exports in years of surplus. Further analysis is needed to assess
the longer term implications of decentralization and changes
in producer subsidies in the food grain sector, including the
impacts of shifting subsidy outlays to public investments, and
of an improved environment for private investment in food grain
markets.
How Was the Study Conducted?
Data and information used to analyze developments in India’s
wheat and rice sectors were taken from published literature
and publicly available Indian data sources. A spatial model
of India’s wheat and rice sectors was developed to analyze
the impacts of alternative policies on India’s supply,
demand, and trade of wheat and rice, including impacts on producer,
consumer, and government costs across the various States of
India. Support for this study was provided by the ERS-India
Emerging Markets Project.
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