This project aims at understanding the combined effect of two state policies related to the production and distribution of food, namely the sharply rising minimum support prices (MSPs) offered to farmers to procure agricultural products and the subsidised distribution of food grains through the public distribution system (PDS). These are closely related in that high procurement prices are often justified by need to provide farmers adequate incentives to supply the additional quantities that are being distributed through the PDS. Also, the difference between procurement prices and the subsidies prices offered through the PDS determine the size of the food subsidy bill. The total cost of food subsidies have risen dramatically from about 2 per cent of agricultural GDP in the nineties to over 5 per cent in recent years. The National Food Security Act (NFSA) passed in 2013 aims at expanding the availability of food grains to two-thirds of the Indian population and the coming years are likely to witness even faster increases in the food subsidy bill that those experienced in the recent past.
The project has two main objectives. The first is to theoretically examine the different impact of these policies of the distribution of income. The second is to empirically estimate their impact on the production, consumption and distribution for different landholding groups in rural Bihar. Our conjecture is that procurement policies and food subsidies affect opposite ends of the rural income distribution. Higher support prices are likely to disproportionately benefit mainly large farmers who are likely to have the relevant networks and are able to cover the fixed costs of selling to the government. Food subsidies on the other hand, are designed to provide the largest quantities and the lowest prices to the poorest households. The combined expansion of these two schemes may adversely affect small and medium landowners who face depressed prices for selling food grains in the local market while obtaining limited food subsidies through the PDS.