Grain price stabilization in India: Evaluation of policy alternatives

Stabilization of prices is an important element of food policy in India as in most other countries — both developing and developed. However, since the magnitude of grain stocks held for this purpose as well as the costs of physical storage have become prohibitively high, there is now a need for finding cost-effective alternatives including non-interventionist and market-oriented methods for price stabilization. In this paper we consider the case of rice and wheat which are staple foodgrains in India. We make a comparison between alternative price stabilization policies including that of holding buffer stocks in terms of their impact on domestic price stability, producer and consumer welfare and government costs. A multi-market equilibrium framework is used where private storage, consumption, supply and prices of rice and wheat are determined simultaneously. Indian exports and imports are assumed to affect world prices. The alternative price stabilizing mechanisms are ranked according to both the criteria, welfare and price stability achieved. The main findings are as follows. The ranking of alternatives varies with the criterion used. Greater price stability need not necessarily imply greater welfare. The option of variable levies on private external trade turns out to be the most inexpensive and that of domestic buffer stocks the costliest in achieving price stability. Further, the efficacy of buffer stocks and subsidy to private storage in stabilizing prices is lower under free trade as compared to the case where the economy is closed to private external trade.