Economics Term Paper on "Analysis of demand and supply of rice in India and income, demand and cross price elasticity related to it”

TERM PAPER

“Managerial

Economics” “Analysis of demand and supply of rice

in India and income, demand and cross price elasticity related to it”

SUBMITTED TO SUBMITTED BY

NEHA SHANDILYA NAVNEET BHARDWAJ

FACULTY SEC. - R1001

ROLL NO.-A17

REG. NO.-11006438

AKNOWLEDGEMENTThe most precious moments are those when we get an opportunity to remember and thank everyone who has in some way or the other motivated and facilitated us to achieve our goals.

First of all I thank God almighty for giving me his blessings. I thank to my entire teaching community and all friends for being as motivating force behind me all the time I needed them.

I also thank my family and dear ones who stood behind me to support me and giving me their precious time and attention.

Thank you very much.

NAVNEET BHARDWAJ

CONTENTS

Abstract of case Introduction Demand and Supply of rice in

India Factors affecting price of rice Demand elasticity of rice Income elasticity of rice Cross price elasticity of rice Conclusion Research Methodology Bibliography

ABSTRACT OF THE TOPICThe topic of my term paper is “Analysing the demand and supply of rice in India and the demand elasticity, income and cross price elasticity pertaining to the commodity”.

Rice is emerging as a vital export item after the opening up of agriculture market in India. To formulate effective macro economic policy for ensuring both export and domestic consumption of rice, it becomes imperative to understand the dynamics of rice demand and supply. Acknowledging the fact that demand for rice is dependent upon overall consumption fund and other consumption needs of a given household we have employed the theoretical framework of Almost Ideal Demand System (AIDS) to formulate our household demand. Similarly it is also important to understand the supply elasticity of rice so that direction of supply with the implementation of agricultural trade policy can be examine. Using these elasticity’s, an effort is made to understand the possible impact of a price change consequent upon opening up of the rice market on rice demand and supply.

I have taken two states in India, namely Andhra Pradesh and West Bengal for the analysis since they are the two major rice producers in India and rice has the biggest share in the consumption basket of households in these two states.

INTRODUCTIONRice is a very important food source commodity. As the second most produced food in the world, rice is a cereal grain that is grown as a staple. Rice can be grown nearly anywhere. The three largest exporters of rice are the United States, Thailand and Vietnam. Rice is a crop that is best grown where there is a low cost of labour and high levels of rain as rice is a labour intensive crop and requires plenty of water to grow. Rice grains are milled to remove the outer husk, called the chaff. At this stage it is referred to as brown rice. Further processing to remove the bran, residue and germ make it into white rice, commonly found in stores.

Rice Commodity Research & Analysis Report

Rice is the second most produced food in the world. Rice is a cereal grain grown as a staple food for much of the world’s population. Rice Fundamental Commodity Analysis (short term investment): Rice is rated a sell; although World Wealth could not find adequate publicly traded companies to indicate the true potential of rice. Rice Value Investor Survey (long term investment): Rice has an average growth potential as per the investor survey results.

Rice SWOT Analysis

Strength: Rice is the number one staple food source for much of the world. Weakness: There is little tradable supplies of crops, so forming an international market for rice is difficult.

Opportunity to grow: Rice may become more popular as Asian cuisines increase in popularity worldwide.

Threats to growth: High recent farming cost could lower the profitability of commodities.

Rice Trade Analysis

The commodity analysis sell rating indicates that rice should decrease in price over the short term, whereas an average investor survey means rice may stay the same in price over the long term.

India Country & Currency Analysis Research Report

India (INR) has a highly regulated economy. However, recent liberalization has transformed the economy towards a capitalist, market-based system.

India's Fundamental Currency Analysis (short term investment): India’s currency is fairly valued with very low investment flow potential combined with very high purchase price parity potential.

India's Value Investor Survey (short term investment): India’s economic environment is unfavourable for long term economic growth due to low scores on economic freedom, transparency, economic diversity, and the SWOT analysis.

India's General Trading Partners: Belgium, Pakistan, the UK, Japan, and the US are the top export partners. India's Commodity Trading Partners: India produces a significant amount of staples for domestic use and needs to import energy.

SWOT Analysis of India

The leading Indian strength is their supply of natural resources, while the main weakness is a lack of infrastructure. India's Currency Trading Strategy: A fairly-valued currency, very low investment flow potential and an unfavourable business environment leads to a negative outlook for Indian investments.

Industry Investment Impact

The total factor productivity (TFP) of rice grown in various regions of India and examines the sources of productivity growth and marginal rates of return to public investment in rice research. The paper also projects the supply and demand of rice in the 21st century in India. The results of the study highlight a spectacular increase in rice yield from 1.1 t ha-1 in 1967-71 to 1.9 t ha-1 in 1997-99. The TFP index has risen at 0.9% per annum and has contributed one-third of production growth. A decelerating tendency in TFP growth is observed. The cost per unit of rice has declined steadily. The cultivation of basmati rice has benefited farmers in the northern states of India. Demand for rice will be met in the future with a marginal surplus for trade. To maintain the surplus status of rice, the study emphasizes the need to strengthen efforts to increase production by maintaining or increasing TFP through public investment in irrigation, infrastructure development, research, and efficient input use. More than half of the required growth in yield to meet the demand target must be met from research efforts in developing location-specific and low-input-use technologies with emphasis on the regions where current yield is below the required national average yield. All efforts need to concentrate on accelerating growth in TFP while conserving natural resources and promoting the ecological integrity of the agricultural system.

POSITION OF RICE IN CURRENT YEAR

Rice strengthened in the wholesale grains market in current year first quarter on increased off take by stockists and local parties. However, other commodities continued to be traded in a limited range on some deals.

Market men said, the pick up in demand from rolling flour mills and local parties helped rice prices to recover.

In the rice section, Permal raw new, Sela and rice IR-8 traded higher at Rs 1145-1170, Rs 1450-1500 and Rs 1100-1120 per quintal respectively. The following were quotations per quintal:

In thin trading, non-basmati rice prices declined in the wholesale grains market on Saturday on increased offerings by stockists against sluggish demand.

Traders said stockists selling against reduced demand mainly pulled rice prices down. In the rice section, Permal raw lost Rs 35 at Rs 1100-1160 per quintal while Sela lost Rs 40 at Rs 1430-1500 a quintal. Rice IR-8 traded Rs 20 down at RS 1000-1030 a quintal for want of support.

Rice basmati (lal quila) at Rs 5000/quintal, Shri Lal Mahal at Rs 4800/quintal, Basmati common 3850-4050, Permal raw new 1145-1170, old 870-900, Permal wand 1260-1325, Sela 1450-1500 and rice IR-8 1100-1120.

DEMAND OF RICE

India's demand for rice is projected to rise to 211 million tonnes in 2020 from an estimated 132 million tonnes in 2000 and when combined with feed use it will be around 260 million tonnes.

For the study purpose, I have taken demand of rice for the state West Bengal and Andhra Pradesh into consideration.

In Indian agriculture rice holds a special place, being suited to the soil and climate of the country more importantly, being a labour intensive crop, rice absorbs a large section of the rural labour force and in that sense is a dominant source of employment in the country. Above all, several studies have demonstrated India’s comparative advantage in rice and under the given conditions the prospect of rice export. True to this hypothesis rice has emerged as a prominent export item with the initiation of economic reforms. Until Recently, export in India was a residual in nature, so the demand projections will enable us to determine the export potentiality of some

commodities. Given this background I have tried to examine the potentiality of surplus generation from two large rice producing states (Andhra Pradesh & West Bengal). In the liberalized economy the demand projections will give us an idea about the future domestic demand of food. As the economy is opening up the price levels and income levels are changing. In this changing scenario the demand elasticity will help us to get an idea about future trend of demand of some important food items. Ultimately the elasticity will help us to get an idea regarding the availability of surplus rice in future which can be exported.

In this paper I have tried to estimate the demand elasticity of rice in West Bengal and Andhra Pradesh using secondary data. Actually, Andhra Pradesh and West Bengal are two large producers of rice producing approximately 10.14% and 16.61% of total production of rice in India respectively. This paper is an exercise to estimate demand elasticity of rice in two states of India and also income elasticity and cross price elasticity of rice taking into consideration cost of production. The purpose is to understand what might happen to demand for rice once the rice market is opened up to global competition and also to determine the income elasticity and cross price elasticity so that we can determine the potential for surplus from these two states.

Factors that affect Rice Prices are as follows

• Weather: Role of weather in rice production is immense. Temperature, rainfall and soil moisture are the important parameters that determine the crop condition. Further, natural calamities can also affect crops. Markets keep watch of these developments.

• Minimum Support Price: Changes in the minimum support prices (MSP) by the government also have immense impact on the price of rice.

• Government policies: Exchange rates, Fiscal policies, Export incentives and export promotion also influence price.

• Substitute Product: Availability of substitute products at cheaper rate may lead to weakness in demand. This situation happens especially when the main products price tends to become higher.

• Consumption: Rice consumption depends on two factors - population and income. Let’s take for example Asia. Rice is the staple food of Asia. Low-income groups consume more rice according to the per capita income increase. But as the income increases, there arrives a point when the consumption starts to dip. Income growth and reduction in population result in a low consumption of rice.

• Seasonal cycles: Seasonal cycles are present in rice cultivation. Price tends to be lower as harvesting progresses and produce starts coming into the market. At the time of sowing and before harvesting price tends to rise in view of tight supply situation.

• Demand: Import demands as well as domestic demand.

• Breakthrough in the technology may increase the productivity and would lead to more supply. This may bring some softness in the price.

From a nation dependent on food imports to feed its population, India today is self-sufficient in grain production and also has a substantial reserve. The progress made by agriculture in the last four decades has been one of the biggest success stories of free India. Agriculture and allied activities constitute the single largest contributor to the Gross Domestic Product, almost 33% of it. Agriculture is the means of livelihood of about two-thirds of the work force in the country.

India is the world's second largest rice producer, followed by China. The production of rice in India has shown an increasing trend which is evident from the Table given below:

YEAR PRODUCTION (in million tonnes)

1948-49 53.63

1958-59 74.292968-69 82.541978-79 86.081988-89 89.681998-99 84.982008-09 93.08

The demand for rice in India is projected at 128 million tonnes for the year 2012 and will require a production level of 3,000 kg/hectare significantly greater than the present average yield of 1,930 kg/hectare. Government of India is targeting to achieve production of 129 million tonnes of rice by 2011-12 with the growth rate of 3.7% along with other foodgrains.

Major State Production of Rice in India

Production (in million tonnes)

State 2006-07 2003-04

Uttar Pradesh 42.32 45.65

Punjab 25.32 25.20

Andhra Pradesh 14.53 13.70

West Bengal 13.83 14.92

Haryana 13.25 13.06

Bihar 12.06 14.39

Karnataka 10.95 9.86

Maharashtra 10.08 12.70

Rajasthan 10.04 10.68

Madhya Pradesh 8.93 21.27

Tamil Nadu 8.90 8.97

Orissa 4.98 5.62

Assam 4.17 4.04

Gujarat 3.68 4.05

Chhattisgarh 3.65 -

Minimum support price of rice (Rs/quintal):

Year Common % Change Permal Sela Basmati

1994-95 340 9.7 360 380 -

1995-96 360 5.9 375 395 -

1996-97 380 5.6 395 415 -

1997-98 415 9.2 - - 455

1998-99 440 6.0 - - 470

1999-00 490 11.4 - - 520

2000-01 510 4.1 - - 540

2001-02 530 3.9 - - 560

2002-03 530 - - - 560

2003-04 550 3.8 - - 580

2004-05 560 1.8 - - 590

What is price elasticity of demand???

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income).

Price elasticity is almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

Different degrees of elasticities of demand

Perfectly elastic demand

In this elasticity is equal to infinity, i.e. Ep=∞.in this case unlimited quantity of commodities can be sold at the prevailing price and even a negligible increase in price would result in zero quantity demanded.

Highly elastic demand

When proportionate change in quantity demanded is more than a given change in price, the commodity is regarded to have a highly elastic demand. In this Ep>1.

Unitary elastic demand

When a given proportionate change in price brings about an equal proportionate change in quantity demanded, then demand for commodity is regarded as unitary elastic. In this Ep=1.

Relatively inelastic demand

When change in quantity demanded is found to be offset by change in its price, then the commodity has a relatively in elastic demand. In this Ep<1.

Perfectly inelastic demand

In this case the quantity demanded of a commodity remains the same, irrespective of any change in the price, i.e. quantity demanded is totally unresponsive to changes in price. In this Ep=0.

Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.

PED is derived from the percentage change in quantity (%ΔQD) and percentage change in price (%ΔP).

Price elasticity of rice

Price elasticity is the measurement of change in demand of a particular commodity in respect of the change in its price. Price elasticity of rice will measure the change in the demand of rice, in respect of the change in its price.

In Andhra Pradesh-

Andhra Pradesh is a state situated on the south eastern coast of India. It is India's fourth largest state by area and fifth largest by population. Its capital and largest city is Hyderabad.

Andhra Pradesh is historically called the "Rice Bowl of India". More than 77% of its crop is rice. Andhra Pradesh produced 17,796,000 tonnes of rice in year 2009.

Price of rice- Rs 1430/qn Original demand-82%

New price- Rs 1480/qn New demand-77%

By putting the above figures in the formula, we get:-

Price elasticity of rice=1.43

Ep=1.43

Price elasticity of rice is relatively inelastic.

Note-The above calculation is for the Sela variety of rice and the figures are taken on an approximate basis.

In West Bengal-

Price of rice-Rs 4730/qtl Original demand-76%

New price- Rs 4755/qtl New demand-74%

By applying the same formula we get-

Price elasticity of rice=3.84

Ep=3.84

Price elasticity of rice is relatively inelastic.

Note-The calculation is done for basmati variety of rice and the figures are taken on an approximate basis.

What is income elasticity???

In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, holding all prices constant. It is calculated as the ratio of the percentage change in demand to the percentage change in income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.

Types of income elasticises

Income elasticity can be of three types, namely:-

1) Negative income elasticity

2) Positive income elasticity

3) Zero income elasticity

A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes.

A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. If income elasticity

of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.

A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods.

Income elasticity of demand can be used as an indicator of industry health, future consumption patterns and as a guide to firms investment decisions. For example, the "selected income elasticity" below suggest that an increasing portion of consumer's budgets will be devoted to purchasing automobiles and restaurant meals and a smaller share to tobacco and margarine.

Income elasticity of demand

In Andhra Pradesh

In a state like Andhra Pradesh the change in quantity demanded is quite high in relation to a change in income, because the people over there have low per capita income. Thus, whenever if there is any rise in price of rice in the state the demand for it change to a certain extent, although it is almost negligible but still much to be considered .

In West Bengal

West Bengal is a much developed state in comparison to Andhra Pradesh and also the income of the people over there is much high as compared to Andhra Pradesh. There is hardly any change in the quantity demanded for rice ii the prices go up because people have more purchasing power and also rice is one of the main food over there, so people prefer to eat rice frequently.

What is cross price elasticity???

The demand of a commodity is affected by a change in the prices of related commodities also. Cross elasticity of demand measures a change in the quantity demanded of a particular commodity in response to change in the price of some related commodities. It can be defined as proportionate change in the demand of commodity X in response of a proportionate change in the price of a related commodity Y.

Types of cross price elasticity

1) Positive cross elasticity

Positive cross elasticity implies that between two goods X and Y, quantity demanded of X moves in the same direction as the price of Y. Such goods are known as substitute goods.

2) Negative cross elasticity

Negative cross elasticity implies that between any two commodities X and Y, the quantity demanded of one would move in the opposite direction as the price of the other. Such goods are known as complementary goods.

Although rice do not have any close substitutes, its cross price elasticity can be measured on the basis of its different varieties.

Quantity demanded of rice (Sela)- 70%

New quantity demanded (Sela)- 78%

Price of basmati-Rs 50/kg

New price of basmati- Rs 48/kg

Ec=change in quantity demanded of sela/change in price of basmati

Putting the values in the formula, cross price elasticity comes 2.

CONCLUSION

At last it can be concluded that rice is a major food grain for India, for domestic consumption as well as for exports. India is one of the leading rice producer as well as consumer in the world.

After calculating the demand elasticity, cross elasticity and income elasticity of the rice it can further be concluded that their is hardly any change in the demand of rice in respect of the change in the price, although the consumers may shift over to other varieties of rice, but the overall demand for rice is never decreased.

METHODOLOGY

I have used secondary data to prepare the term paper from the various sources such as reports, articles and news.

BIBLOGRAPHY

www.wikipedia.org

www.wbgov.in www.apgov.in Text book