Farm Support and Market Distortion: Evidence from India
57 Pages Posted: 10 Jun 2020 Last revised: 8 Oct 2020
Date Written: July 24, 2020
Using a recently implemented Price Deficiency Payments (PDP) policy in India known as the Bhavantar Bhugtan Yojana (BBY), we examine how such farm support policies affect farm-gate prices and quantity arrivals. We study two major crops covered under the scheme, Urad (Black-gram) and Soyabean. We find that Urad prices fell by 4 percent, and quantity arrivals increased by 42 percent during the BBY period. In contrast, we find no significant effect on Soyabean. We argue that the size of deficiency payments can explain this difference in market outcomes. Using bid-level crop auction data, we rule out collusion among intermediaries as a potential explanation for our results. Finally, we estimate the monetary losses incurred by the farmers and the government due to this policy.
Keywords: price deficiency, price loss coverage, farm support, equilibrium price, collusion
JEL Classification: Q11, Q14, Q18
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