Understanding Price Variation in Agricultural Commodities in India Shoumitro Chatterjee, Princeton and Devesh Kapur, UPenn India Policy Forum, July 2016
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Understanding Price Variation in AgriculturalCommodities in India
Shoumitro Chatterjee, Princeton and Devesh Kapur, UPenn
India Policy Forum, July 2016
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Avg Standard Deviation of log real pricesWheat & Paddy in 16 Largest States
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Why should we care?
Important for development of India.
Consumers pay different prices in different regions.
Farmers in different locations face different prices.
They make crop choices and input choices given these prices.
Important to understand farm productivity and farmer welfare.
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Outline
Creation of new Agriculture Markets.
Decomposition of Variance
Conceptual Framework
MSP and Government Procurement
Mandis and Market Power
Future Work and Policy Questions
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Acts Governing Agriculture Trade in India.
Food Adulteration Act, 1954
Essential Commodities Act, 1955
Standards of Weights & Measurement Act, 1976
Prevention of Black Marketing & Maintenance of Supply ofEssential Commodities Act, 1980
Consumer Protection Act, 1986
Bureau of Indian Standards Act, 1986
Agriculture Produce (Grading & Marketing) Act, 1986
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Fraction of Mandis Constructed by year
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Cereal Output per Mandi
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Variance Decomposition (Shapley Shorrocks)
37%: District Specific Time Invariant effects.
Market Structure, Access to Irrigation, Productivity
20%: Location invariant aggregate time shocks.
Global Demand
4%: Rainfall Shocks
39%: Location and Time varying factors.
Connectivity and Procurement of Grains
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Variance Decomposition (Shapley Shorrocks)
37%: District Specific Time Invariant effects.
Market Structure, Access to Irrigation, Productivity
20%: Location invariant aggregate time shocks.
Global Demand
4%: Rainfall Shocks
39%: Location and Time varying factors.
Connectivity and Procurement of Grains.
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A Conceptual Framework
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A Conceptual Framework
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Data Sources
Time period 2005-2014. Commodities – Paddy & Wheat.
Monthly Wholesale price and quantity data. (Govt. of India’sAgmarknet Project).
Seasonal yields and production data at the district level. (Min-istry of Agriculture, GOI)
Monthly Rainfall - gridded data from Willmott and Matsuura(2012).
Population at sub-district level from Census of India 2011.
Farmer level data from NSS - Situation Assessment of Agricul-tural Households 2012-13.
District level monthly grain procurement - Food Corporation ofIndia.
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Govt Procurement of Paddy and Wheat
Through Food Corporation of India and State Agencies
“Government policy of procurement of Food grains has broadobjectives of ensuring MSP to the farmers” – FCI Website.
Extensive Operations with about 20000 centers for Wheat and40000 centers for Paddy.
What does the data tell us?
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Procurement varies widely in space
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Procurement varies widely in space - even within states
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Understanding Spatial Variation in Procurement:Some Hypothesis.
Presumably linked to spatial variation in procurement centers.
What drives this variation?
Path dependency - spatial variation of green revolution.
Fiscal Constraints.
Political Economy.
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Half of all Mandi transactions are below MSP
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What is the effect on market prices?
(pcdt −mspct
mspct
)= α+ β1 {procurementcdt > 0}+ γd + γt + εcdt
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Local market power of Mandis
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Spatial Distribution of APMC Markets - Andhra Pradesh
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Spatial Distribution of APMC Markets - Uttar Pradesh
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Summary Statistics - Spatial Distribution of Markets
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Summary Statistics - Spatial Distribution of Markets
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Analysis 1: Using within state variation
lnpricecmdt = α+∑b∈B
β1b (#mandi)mb+∑c∈C
β2c ln raindt×1 {crop = c}
+ β3Local Demandm + β4 ln yieldcdt + γc + γs + εcmdt
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Analysis 2: Matching near state borders - An Illustration
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Matching near state borders - An Illustration
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Matching near state borders - An Illustration
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Matching near state borders - An Illustration
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Results
ln pcmt = βcompm + γc + γs + γt + εcmt
ln pcmt − ln pcm′t = β (compm − compm′) + γss′ + εcmt
compm =∑
j∈M(m)
dist−1mj
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Conclusions & Policy Questions
Core objective of MSP is not being met.
Large spatial variation in procurement and is likely to have sig-nificant welfare and distributional consequences.
Policy goal should be to provide more options to the farmers.
Regulations in APMC acts have created market power for man-dis which has clear price effects.
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Conclusions & Policy Questions
Reforms under Model APMC Act –
Levies taxes on transactions outside the mandis.
Some states went back on reforms.
Has failed to attract private players.
NAM – welcome change but effects remain to be seen.
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Stylized Fact#1: Farmer’s Awareness of MSP.Limited and Highly Varying.
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Stylized Fact#2: MSP Awareness vs intensity of pro-curement
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Stylized Fact#3: Procurement varies widely in space
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