Farm Support and Market Distortion: Evidence from India

American Journal of Agricultural Economics, Forthcoming

57 Pages Posted: 10 Jun 2020 Last revised: 8 Aug 2022

See all articles by Shekhar Tomar

Shekhar Tomar

Indian School of Business

Abhinav Narayanan

Government of India - Reserve Bank of India

Date Written: July 31, 2021

Abstract

Using a recently implemented Price Deficiency Payments (PDP) policy in India, we examine how PDP affects farm-gate prices and crop supply. We document a new channel, the fall in reservation price of farmers under PDP, behind the decline in farm-gate prices. This impact depends on the magnitude of the deficiency payments and can lead to a supply glut and price crash. Empirically, the scheme led to a 4 percent decrease in farm-gate prices and a 51 percent increase in market arrivals for Black-gram, a crop with a high magnitude of PDP. Using bid-level data on crop auctions, we rule out collusion among the market participants, another potential channel for price crash under PDP. The effects of the policy are transitory and disappear after the policy is withdrawn. In terms of welfare effects, this scheme is associated with a monetary loss of INR 1 billion.

Keywords: price deficiency, price loss coverage, farm support, equilibrium price, collusion

JEL Classification: Q11, Q14, Q18

Suggested Citation

Tomar, Shekhar and Narayanan, Abhinav, Farm Support and Market Distortion: Evidence from India (July 31, 2021). American Journal of Agricultural Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3601917 or http://dx.doi.org/10.2139/ssrn.3601917

Shekhar Tomar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

HOME PAGE: http://shekhartomar.com

Abhinav Narayanan (Contact Author)

Government of India - Reserve Bank of India ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

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