Food Grain Policies in India and their Implications for Stocks and Fiscal Costs: A Partial Equilibrium Analysis

This paper analyzes current and possible future reforms of the Indian food policies of the two most important staple grains, wheat and rice, within a two commodity dynamic partial equilibrium model with stochastic shocks. The model is empirically grounded and reproduces past values well. It uses a new reduced-form approach to capture private storage dynamics. We evaluate implementation of the National Food Security Act (NFSA) under several policy measures with the current regime as well as two scenarios with a regime change - implementation of cash transfers and deficiency payments. Implications for market fundamentals and fiscal costs were simulated in the medium term - until 2020/21. The NFSA puts a high pressure on fiscal costs and public stocks. Relying on imports with low MSPs results in a high stock-out risk and the lowest fiscal costs, however with high domestic price levels and volatility and high international prices. A policy strategy to manipulate procurement prices in order to maintain public stocks close to the norms leads to slightly higher fiscal costs with lower and more stable prices and ample stocks. A cash-based regime can bring considerable savings and curb fiscal costs, particularly if targeted to the poor, and would leave ample stocks due to higher private stocks. However, this scenario shows the highest market price levels and variability, which can have negative effects on some producers and consumers as well as political stability.