Efficient Redistribution through Deregulation of Domestic Grain Markets

Governments often actively participate in storage and trading activities and impose price controls to allay fears of future scarcity and to control ‘collusive practices’ and ‘speculative activities’ of private operators. In this paper, we analyze the impacts of deregulating domestic grain markets in India based on a spatial equilibrium model of interstate trade under arbitrage opportunities. We consider three alternative scenarios: relaxing restrictions on private domestic trade, decentralizing procurement of grains to support the Public Distribution System (PDS) and reducing the artificially high ‘minimum support prices’. In a liberalized trade regime for both domestic and foreign trade, a deficit state could import grains from a neighboring deficit state, which in turn imports from another deficit or a surplus state or even from abroad depending on arbitrage benefits. As restrictions are relaxed, prices stabilize across states and there are welfare gains to producers, consumers and wholesale traders at the national level though there are certain distributional implications. There is a steep reduction in government cost from deregulating domestic trade as costs of both procurement and storage fall since traders prefer to sell in the open market than to public agencies at MSP. Decentralized procurement at market prices to run safety net programs further reduces public costs. Providing greater role for market encourages efficient choice of cropping patterns by farmers. Better transport infrastructure can provide further welfare gains by reducing transaction costs of private traders. Q Paper prepared for presentation at the conference on Anti-poverty and Social Policy in India at the Neemrana Fort-Palace near Delhi, India, hosted by the MacArthur research network on Inequality and Economic Performance, January 2-4, 2004. * This paper draws on Jha and Srinivasan (2003). We would like to thank seminar participants at the International Food Policy Research Institute, World Bank and Colombo, Sri Lanka, where earlier versions of this paper were presented. However, we alone are responsible for any remaining errors.