The Food Corporation of India and the Public Distribution System: Impacts on Market Integration in Wheat, Rice, Pearl Millet, and Corn

This paper examines the spatial integration of major staple commodity markets in India. We consider wheat, rice, pearl millet, and corn markets. This set represents the two most highly regulated crops, wheat and rice; and two that are regulated to a lesser degree, pearl millet and corn. Our data come from the states of Bihar, Haryana, Uttar Pradesh, and West Bengal, states that produce a large share of India’s cereal grains. Access to food remains an important issue for India as it develops. Because of this, the Indian government regulates the markets for staple foods heavily, requiring almost all grain be marketed through government licensed mandis. The government enforces a minimum price in the regulated markets by placing government buyers in each market that will purchase any amount of grain meeting minimum quality standards at the minimum support price. This activity results in the government being the primary entity engaged in the storage of staple food crops. These market interventions discourage private investment in storage capacity among farmers and traders who handle grain in the private sector, which could impact market integration and efficient price transmission. However, we find the strongest evidence for market integration in the rice markets, which is one of the most regulated of the crops considered. Therefore, there seems to be some benefit from the government’s market making activities that may compensate for a lack of infrastructure to facilitate market integration