Indian Wheat and Rice Sector Policies and the Implications of Reform
by Shikha Jha, P.V. Srinivasan, and Maurice Landes
Economic Research Report No. (ERR-41) 52 pp, 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
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
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.