OPTIONS FOR RESTRUCTURING THE INDIAN
WHEAT MARKET
Steve McCorriston (University of Exeter, UK)
Donald MacLaren (University of Melbourne, Australia)
Final International Workshop on
“Facilitating Efficient Agricultural Markets in India: An Assessment of Competition and Regulatory Reform”
New Delhi, India, 15th February, 2011
Focus of this research
• To consider the role that the Food Corporation of India
currently plays in meeting the objectives of government policy
via the procurement and distribution of wheat.
• To provide a quantitative analysis of current arrangements
and consider alternatives whereby the role of the Food
Corporation is reduced and the procurement and
management of wheat is increasingly accounted for by the
private sector.
Methodology
• To take the objectives of the FCI:
(i) effective price support operations for safeguarding the interests of the
farmers;
(ii) distribution of food-grains throughout the country for the public
distribution system; and
(iii) maintaining satisfactory level of operational and buffer stocks of foodgrains to ensure National Food Security (FCI, 2011a).
• To “increase” the role of the private sector in the
wheat marketing chain
• As the role of the FCI changes -retaining (iii)-while
allowing for alternative policy instruments to meet (i)
and (ii).
How?
• Based on a theoretical model calibrated with data of the
Indian wheat market for 2008/09.
• To consider the effects of de-regulation across various
metrics:
-aggregate:
social welfare
-distributional effects:
consumer and producer surplus
-food security metrics:
self-sufficiency; total availability; changes in retail and
producer prices; changes in marketing margins.
-budgetary impact.
To consider the potential effects of :
(a) improved efficiency and (b) competition in the wheat
marketing chain
• Assume for the moment no farm price support nor public
distribution...we return to these below.
• Allow for improved efficiency in procurement and distribution
of the state enterprise
• Allow for varying degrees of competition in the wheat
marketing chain.
• ....take the inefficiency issue first
Figure 1: Welfare Impact of an Inefficient, Welfare Maximising State Enterprise
0
% Change in
Social Welfare
-5
% Change in
Producer
Surplus
% Change in
Consumer
Surplus
-10
25% less efficient
% Change
50% less efficient
-15
-20
-25
Figure 2: Food Security Implications of an Inefficient, Welfare Maximising, State Enterprise
25
20
15
10
5
25% less efficient
0
50% less efficient
% Cha nge
-5
-10
-15
-20
Change in Total
Availability (%)
Change in
Consumer
Prices (%)
Change in Farm
Gate Prices (%)
Figure 3: Welfare Implications of Private Firm Scenarios with Welfare Maximising, Inefficient State Enterprise
30
20
10
n=4
% Cha nge
n=20
0
% Change in Social
Welfare
-10
-20
-30
% Change in
Producer Surplus
% Change in
Consumer Surplus
n=100
Figure 4: Food Security Implications of Private Firm Scenarios Compared with
Welfare Maximising, Inefficient State Enterprise
30
20
10
n=4
% Change
0
n=20
Change in Total
Availability (%)
-10
-20
-30
Change in Consumer Change in Farm Gate
Prices (%)
Prices (%)
n=100
Summary
• State enterprise inefficiency has a considerable negative
impact on welfare and food security metrics
• A competitive wheat marketing chain can increase
consumer and producer surplus and improve food
security metrics
• Need complementary policies (competition
policy/regulatory structure) to ensure this outcome
The FCI and Alternative Policy Instruments
• Recall the functions of the FCI
-the MSP
-the TPDS
-the buffer stock
• We retain the objectives of government policy but consider:
-the MSP is replaced by a guaranteed price/deficiency
payments scheme
-the TPDS is replaced by a food stamp programme
-the FCI retains its role in managing the buffer stock
Assume first of all retaining the current arrangements with
different degrees of competition in the wheat marketing chain
50
40
30
20
% Cha nge
10
0
% Change in % Change in % Change in Change in
Social
Producer
Consumer
Total
-10
Welfare
Surplus
Surplus
Availability
(%)
-20
Change in
Consumer
Prices (%)
Change in
Farm Gate
Prices (%)
Then with alternative policy instruments (deficiency payments
and food stamp programme with FCI retaining the role of
managing the buffer stock).
200
150
100
% Change
50
0
% Change in
Social Welfare
-50
% Change in
Consumer
Surplus
Change in Total
Change in
Availability (%) Consumer Prices
(%)
Conclusions
• Retaining the structure of the current regime and retaining
the responsibilities of the Food Corporation of India, but
improving the efficiency of its operations could bring
significant benefits to consumers and producers and improve
food security.
• Retaining the current regime and providing an enabling
environment in which private firms can enter and compete
more effectively in the procurement and marketing of wheat
would likely bring significant benefits.
• Maintaining the policy objectives of the government but
achieving them through the use of other instruments, while
maintaining the role of the Food Corporation in managing the
buffer stock, could bring significant benefits in welfare,
principally to consumers, without adverse effects on
producers.