Foodgrain Price Policies in India: The Effects on Foodgrain Production and Rural Poverty 1951-2001

There is a large research literature which quantifies the important contributions of public, private and human capital to economic growth and poverty reduction. However, studies based on the endogenous growth model tend to exclude the effects of relative prices on economic growth. This paper develops a simple growth model which details the effects of minimum producer support prices and maximum consumer issue prices on Indian foodgrain production and rural poverty, subject to a long run government budget constraint. The major structural changes in the non-stationary variables are endogenously identified over the period 1951 to 2001 and the Johansen FIML procedure is used to derive efficient estimates of important long run elasticities. It is found that a one per cent increase in the real minimum producer support price for wheat will increase real foodgrain production per rural worker by 1.3 per cent in the long run. Similarly, a one per cent reduction in the real consumer maximum issue price for wheat (via the public distribution system) will reduce the rural head count poverty ratio by 1.3 per cent in the long run. The government budget constraint applies in the long run whereby a one per cent increase in the minimum producer support price requires the consumer maximum issue price to increase by 1.5 per cent. However, these prices can be moved in opposite directions to reduce poverty in the short run. A one per cent increase in the minimum producer support price is found to Granger cause the maximum issue price to fall by 1.1 per cent in the next year. This dynamic growth analysis confirms that price policy in India since independence has importantly promoted the production of foodgrain and contributed to the reduction in rural poverty. Prices can be powerful policy instruments and the elasticity estimates contained here certainly support this view.