Food grain policies in India

December 15, 2016.  

From what was once a famine-prone country, India has now become a large exporter and stockholder, with stable domestic prices and several nutrition programs. However, 15 percent of the Indian population is still undernourished.
The current implementation of the National Food Security Act is experiencing many challenges while a switch to a cash-based system is being vociferously discussed. The Act provides, inter alia, a legal right to food at subsidized prices for 67 percent of India’s population. It is based on the pre-existing Public Distribution System, which delivers subsidized wheat and rice to poor households across the country.

Strong impact of policy measures on market outcomes

Production, consumption, procurement, stocks and trade in India are strongly affected by policy measures. Among other conclusions, research found that the support prices have a strong impact on wheat and rice production, whereas rice consumption is mostly driven by the distribution of the subsidized grains. Protectionist trade policies mean that the export of grain is so distorted that its volumes hardly correlate with prices.

In-kind or cash-targeting issues

Based on household consumption data, this research revealed some serious targeting errors in the Public Distribution System. Many poor households were excluded from the system and migrant workers and female-led households were often not well covered. On the other hand, consumption of subsidized grains decreases substantially as the income of a household increases. This negative self-selection brings savings to the system, which would be lost under an alternative cash-transfer scheme. Leakage rates, that is to say, subsidized grains not reaching the poor, are in general very low for the poorest households and regions.

Assessing reform options – difficult choice between fiscal costs and market prices

Since 2006, there has been a clear upward trend in inflation-adjusted fiscal costs as a consequence of the growing procurement, storage and distribution of wheat and rice. Research findings indicate that the implementation of the National Food Security Act will put even higher pressure on fiscal costs and public stocks. These high fiscal costs and public stocks could be mitigated at the cost of higher and more volatile market prices. This research showed that a cash-based regime generates lower fiscal costs while total stocks remain sufficient due to the increase in private stocks. However, higher market prices and volatility under this system may have a negative impact on producers and consumers, as well as on political stability.

Regardless of the choice between in-kind and cash policy instruments, on-going corruption needs to be reduced. The scale of corruption has an impact on the outcomes of National Food Security Act.

Marta Kozicka started working as a senior researcher for the PARI project after finishing her doctoral research on policies for food security in India.

This article was published in ZEFNews 34


Marta Kozicka

Dr. Marta Kozicka