The impact of two-tier producer and consumer food pricing in India

14 01 ct THE WORLD BANK ECONOMIC REVIEW, VOL. 8, NO. 1 103 -125 ZFI I19' The Impact of Two-Tier Producer and Consumer Food Pricing in India Maurice Schiff India's government buys wheat, rice, and sugar at below the market price and then sells it in ration shops in the urban and rural areas. The rest is sold in the open market. This creates a two-tier price system for consumers and producers. Supporters of the govern- ment's procurement policy claim that it raises the open-market price so much that it increases the sales-weighted average of the rationed price and the open-market price; in that case, both thefarm sector as a whole and low-income urban consumers with access to the ration shops gain, and high-income urban consumers who buy at the open- market price lose. This view has provided an intellectual basis for the policy. This article examines a variety of cases: with and without rationing; with rationing through ration cards or queuing; with and without access by the urban rich to the ration shops; with or without free trade; and with a marketable surplus having either positive, negative, or zero price elasticity. The impact of the policy on the average price is in general ambiguous or negative. Under the most plausible assumptions, it is nega- tive, implying thatfarmers as a whole lose from the procurement policy. Governments in developing countries generally discriminate against agricul- ture.1 Export crops are taxed to transfer resources to the rest of the economy, and food crops are often taxed to provide cheaper food to urban consumers.2 To attain the latter objective, several countries have instituted a procurement pol- icy: the government buys food commodities from producers at below-market prices and then sells them to low-income consumers through ration shops. The governments thus impose a producer levy on the output they buy. Producers may supply additional demand at any price the market will bear. This policy results in a two-tier price system for producers and consumers. In the Punjab, India, 1. On the effect of sectoral, fiscal, and industrial policies on agricultural incentives in African, Asian, Latin American, and Mediterranean countries, see Schiff and Valdes (1992). 2. However, Schiff and Valdes (1992) report that when food is imported, most developing countries tax the imports and protect the producers. In those cases, the cheap-food motive is dominated by the self- sufficiency and revenue motives. Maurice Schiff is in the Policy Research Department of the World Bank. The author would like to thank participants at a World Bank seminar sponsored by the Agriculture Division, India Department; at the Agricultural Policy Workshop organized by the World Bank and the Indira Gandhi Institute for Development (New Delhi, January 1993); and at a seminar at the University of Namur (Belgium, August 1993); as well as three anonymous referees, for useful comments.