OPTIONS FOR RESTRUCTURING THE INDIAN WHEAT MARKET

1. 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

2. Focus of this research • To consider the role thatthe 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.

3. 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 food-grains 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).

4. 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.

5. 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

6. Figure 1: Welfare Impact of an Inefficient, Welfare Maximising State Enterprise

7. Figure 2: Food Security Implications of an Inefficient, Welfare Maximising, State Enterprise

8. Figure 3: Welfare Implications of Private Firm Scenarios with Welfare Maximising, Inefficient State Enterprise

9. Figure 4: Food Security Implications of Private Firm Scenarios Compared with Welfare Maximising, Inefficient State Enterprise

10. 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

11. 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

12. Assume first of all retaining the current arrangements with different degrees of competition in the wheat marketing chain

13. Then with alternative policy instruments (deficiency payments and food stamp programme with FCI retaining the role of managing the buffer stock).

14. 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.

15. 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.