Government Intervention In Grain Markets In India--Rethinking The Procurement Policy

This paper reviews the rice procurement operations of the Government of India from the standpoints of cost of procurement as well as effectiveness in supporting farmers' incomes. The two channels used for procuring rice are custom-milling of rice and levy. In the first, the government buys paddy directly from farmers at the minimum support price (MSP) and gets it milled from private millers; while in the second, it purchases rice from private millers at a pre-announced levy price thus providing indirect price support to farmers. Secondary data reveal that although levy imposes a lower unit cost per quintal of paddy procured, over the last decade, custom-milling has become predominant, partly on the argument that it provides minimum price support to farmers. We analyze data from auctions of paddy from a year when levy was still important to investigate its impact on farmers' revenues. We use semi-nonparametric estimates of millers' values to simulate farmers' ex- pected revenues and nd these to be rather close to the MSP; a closer analysis shows that bidder competition is critical to this result. The level of competition in the year of the data for instance, was high enough to offset the impact of sub- optimal reserve prices on revenues. Finally, we use our estimates to quantify the impact of change in levy price on farmers' revenues through its effect on millers' values and competition; and use this to discuss ways to revive the levy channel.