The Impact of Two-Tier Producer and Consumer Food Pricing in India

Abstract

India's government procures agricultural products such as rice, wheat, and sugar at below-market prices and sells them in both urban and rural ration shops. The rest of such crops is sold in the open market. This creates a two-tier price system for consumers and producers. Many (including Dantwala, Mellor, and Hayami, Subbarao, and Otsuka) claim that such a policy raises the open-market price so much that it ultimately increases the average price received by farmers. If true, the gainers would be the farm sector as a whole and low-income urban consumers with access to the ration shops. Losers would be the high-income urban consumers who buy at the open-market price. This view has provided an intellectual basis for the policy. The author examines a variety of cases: with and without rationing, with rationing by ration cards or by queuing, with and without the urban rich having access to the ration shops, with and without free trade, and with a marketable surplus with positive, negative, or zero price elasticity. He finds that in most cases the policy's impact on the average price is either negative or ambiguous, and it is negative in the more realistic cases. A negative impact implies that farmers on the whole lose from the procurement policy. But small farmers who are net buyers of the procured crops, and landless laborers, gain from a lower average price in the short run (especially if they have easy access to the rural ration shops). The long-run effect depends on the impact of the lower average price on rural employment and wages.