Production, Procurement and Inflation: A Market Model for Foodgrains

Abstract

Rapid rise in the prices of foodgrains and their continued upsurge is a matter of concern not only for the government and policy makers but also for anyone concerned with social welfare. This is particularly so because the increased prices of basic food items cause great distress to the poor sections of society who spend a large part of their income on food. Thus, a clear understanding of the causes of inflation is necessary for framing the right policy to tackle the problem. The current study tries to examine how prices are determined in the Indian foodgrain market. This requires a slightly different approach from the conventional demand and supply framework as government intervenes in the market through open-market operations. To this end, we propose a structural model, explaining the behaviour of foodgrain prices for the period 1980–81 through 2011–12 incorporating the role of government interventions. Our results confirm that there is a strong impact of demand- as well as supply-side factors. However, when it comes to controlling inflation, demand-side management turns out to be highly significant. Under supply-side management, increased capital stock is found to be important, in so far as it significantly boosts production. Government intervention through procurement and off-take plays a stabilising role. JELClassification: E31, Q11, Q18