This study evaluates the domestic and international trade and marketing policies in India and analyzes the effects of deregulating domestic markets and liberalizing external trade on the food grain sector.

Historically, India's food policy has involved heavy government intervention in all aspects of the food grain market — pricing, procurement, stocking, transport and marketing. The Food Corporation of India (FCI) is the principal parastatal agency responsible for marketing food grains within the country and controls nearly 50 percent of the grain markets. An analysis of the performance of the FCI, however, reveals enormous and mounting costs of operations that present a huge financial burden for the Government of India (GOI). This study offers a comparison of the costs and functioning of the FCI with that of private traders, in order to suggest policy options for reform. The results show that private traders operate at costs lower than those incurred by the FCI in both storage and trade, despite several controls and restrictions imposed upon them.

Therefore, the finding from this study is that there is a strong case for reform from the efficiency point of view.

In this regard, the government has already initiated steps to encourage private participation in grain markets. The role of the FCI is proposed to be restricted to timely sales and purchases in order to maintain stability in food prices and exports and imports of food grains, as and when required. The budgetary savings of the central government realized by limiting the role of FCI can be used to provide subsidy to the states for the specific purpose of procuring grains through their agencies, private or public. Given the cost factor, they can choose the most appropriate way to purchase grain. However, there is more that needs to be done. If price distortions are eliminated, farmers could shift away from rice and wheat and diversify to high value farming that offers higher market price such as fruits and vegetables, poultry and dairy. Subsidized loans could be offered to improve the restricted access to credit and to encourage private storage facilities that are used co-operatively. In line with this, the National Policy on Handling and Storage of Food grains envisages greater private sector participation in building storage capacities for rental use by government agencies and also in the development of infrastructure for integrated bulk handling, storage and transportation of food grains.

Another major contribution of this study is to analyze and quantify the impacts of relaxation of restrictions on private domestic trade of rice and wheat based on a spatial equilibrium model of inter-state trade that takes place under arbitrage opportunities. A unique feature in the analysis of Indian grain markets is that wholesale and retail traders are considered as a separate set of agents in addition to consumers, producers and the government. The analysis produces some interesting results.

Public sector agencies perceive private traders as competitors to the FCI. Based on this, the general perception is that private trade will mimic the behavior of FCI by, for example, transporting grains from Punjab in the north of the country to Kerala in the south. However, contrary to this perception, results from this study show that private trade does not necessarily take place only and directly between a surplus and a deficit state. The results show that it is possible for a deficit state to import grains from a neighboring deficit state, which in turn could import from another deficit or a surplus state or even from abroad depending on arbitrage benefits. With freer domestic trade, markets reveal all information needed to private profit maximizers who obviously choose the least cost options of trade.

As restrictions on domestic trade are relaxed, prices stabilize across states and there are welfare gains to producers, consumers and wholesale traders at the national level. The gains are much higher in the case of wheat compared to rice. This could be due to the fact that the rice market continues to be controlled through levy procurement. There is a steep reduction in government costs from deregulating domestic trade as costs of procurement and storage both fall, especially due to lower wheat procurement since traders prefer to sell wheat to other states rather than to the FCI, since it fetches them a better price than the Minimum Support Price (MSP). In a liberalized domestic and foreign trade regime, it is also found that states make new trading partners domestically and may even prefer to trade with foreign partners in order to make the best of price differences.

The gains illustrated to accrue from liberalizing domestic and foreign trade are derived from small policy changes that reduce/ eliminate movement restrictions and also from reduced transportation cost. The problem of excess stock accumulation would however not be solved by these policy changes alone. Much higher gains in efficiency and economic welfare are possible if opening up the markets for both domestic and external trade is accompanied by investment in roads and other infrastructure, lower MSP for wheat (just sufficient to act as an insurance in low price years), abolition of the levy on rice procurement and decentralization of FCI's operations.

It is thus socially efficient to open up markets for trade in grains by encouraging private agents to participate in marketing and investment. This can be facilitated by a number of long-term policy changes to reduce transaction costs of private traders. These include encouraging investment and modernization through improved infrastructure (e.g., roads/ ports/ storage), a larger scale of operation (e.g., bulk handling/ transport) and innovations (e.g., fuel-efficient trucks). The government also needs to develop better institutions for improving market information, grading facilities etc.

As for external policy, the era of globalization has brought with it new opportunities as well as challenges to the food security system. Being a signatory to the WTO, the country is moving towards greater openness in agricultural trade. The challenges are in terms of developing appropriate marketing infrastructure and institutions to deal with trade in agricultural commodities and formulate appropriate policies to deal with price risk. The opportunities include reduced dependence on buffer stocks and a greater dependence on trade for price stabilization. As India becomes a major force in the global rice and wheat markets, new strategies are required to sustain its position. To achieve this end, the government plans to promote exports through providing long-term credit, removing export restrictions, establishing Agricultural Export Zones and providing transport subsidies to export rice and wheat from government warehouses. However, there is a need to improve facilities for grading, improve measuring standards, and address quality problems. Exporters also face problems of storage and distribution. In order to take full advantage of growing export opportunities, they would need to have reliable port and domestic infrastructure facilities, which are currently lacking, rather than transport subsidies. The ports are highly congested, with obsolete equipment, and are managed by government-controlled port trusts that are plagued by bureaucracy. Improving these essential facilities through critical investments and institutional changes away from government dominated controls and towards greater private sector participation, would go a long way in reducing the high handling costs and margins of exporters, thereby making India more competitive in the world grain markets.

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