Distortions to Agricultural Incentives in India: Evidence from Agricultural Value Chains

Abstract

With growing population, increasing and still uneven income distribution, achieving food and nutrition security is a critical goal for the Government of India (GOI). GOI implements a wide range of agricultural, trade, and domestic policies to achieve this goal, creating a highly regulated environment for consumers and producers. At the same time, there are new policies, such as biofuels market policies, that create new value chains and new income opportunities for the farmers. Income growth leads to higher consumption of vegetable oils and livestock and dairy products, creating higher value added for oilseeds producers by generating larger markets for by-products. This complicated policy environment affects both the producer and the consumer decisions across the entire value chain. In this context, it is crucial to identify which parts of agricultural distortions in India are due to market failure and which parts are due to effective policy intervention. Agricultural distortions, originating from either policy design or other sources, also create and influence value chains within a country. Therefore, measuring distortions along the complete agricultural value chain is necessary for effective policy design. The objective of the paper is to measure the impact of sector-specific and state-specific policies on agricultural incentives in India across agricultural value chains. Specifically, we focus on two value chains: oilseeds value chain (rapeseed and groundnut complex) and biofuels value chain (ethanol-molasses-sugar-sugarcane complex). We utilize state level price data at different points in the market to measure distortions to agricultural incentives at state level for the primary commodities in these value chains and for the entire value chain. The results show that GOI has effectively protected the farmers for the primary commodities included in this analysis. When a primary commodity is part of a value chain that generates additional products through processing, the effective NRPs for the farmers producing the primary commodity increase. This is due to two channels: first farmers receive higher prices for their crop since there is additional value being generated through a larger market. Second, protection of these processed commodities and their higher prices are transmitted to the primary commodity prices. Measuring distortions along the entire value chain are therefore necessary for effective policy design and evaluation.