Distortions to Agricultural Incentives
Source: Flickr, Utpalendra Deka
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A recent paper measures the impact of sector-specific and state-specific policies on agricultural incentives in India across agricultural value chains.  The paper was undertaken as part of and funded by the CGIAR Research Program on Policies, Institutions, and Markets (PIM) led by the International Food Policy Research Institute (IFPRI) and selected as a paper for the 2016 Agricultural and Applied Economics Association annual meeting.

Achieving food and nutrition security is a critical goal for the Government of India (GOI), thus GOI implements a wide range of agricultural, trade, and domestic policies to achieve this goal, creating a complex policy environment for both consumers and producers. This policy environment affects both the producer and the consumer decisions not only at the specific commodity level, but also across the entire value chain relevant to that commodity. At the same time, there are new policies, such as biofuels, that add new value chains for the farmers’ products. Therefore, measuring distortions to agricultural incentives along the complete agricultural value chain is necessary for effective policy design. This will also allow identification of which parts of agricultural distortions in India are due to market failure and which parts are due to effective policy intervention. As such, the objective of this paper is to measure the impact of state-specific policies on farmers in India across two value chains: the oilseeds value chain for rapeseed (rapeseed, rapeseed meal, rapeseed oil) and groundnut (groundnut, groundnut meal, groundnut oil) and biofuels value chain (sugarcane, raw sugar, molasses, ethanol).

The paper conducts the analysis using state-level data for 2008 through 2011 for the above mentioned commodities and uses a Nominal Rate of Protection (NRP) methodology that relies on price gaps. The study first identifies and then analyses the price transmission along the value chain when there are by-products or processed goods present. It computes NRP for the whole value chain of a product, rather than the NRP for the main primary commodity. The study looks at how NRPs that a farmer faces change with the existence or creation of a value chain.

Nominal rates of protection are computed by comparing domestic prices (actual prices faced by the producer, farm gate harvest price) and reference prices (free of influence from domestic policies’ and markets) for a given agricultural commodity and a given location. In this analysis, three locations of measurement were used: the border, the point of competition, and the farm gate. Price data was taken from a variety of sources: international price data was taken from USDA ERS and GAIN reports, and the Indian state and country level domestic price data was taken from agricultural statistics published by the Indian Government and IndiaStat.

The study finds that between 2008 and 2011, the NRPs for the analysed primary commodities (sugarcane, sugar, groundnut, and rapeseed) are positive for India on average. They are positive in most of the states as well. When NRPs are computed for the value chain, results show that including by-products and processed commodities in the value chain when computing NRP increases the NRPs for the primary commodities significantly. This suggests that Indian farmers on average benefited from creation or expansion of value chains for their produce.

For rapeseed, the study calculates an average NRP of 20 percent for farmers. When the domestic processing of rapeseed oil and rapeseed meal are included, NRP of the rapeseed complex is 122 percent. For groundnut the study calculates a NRP of 11 percent for farmers. When domestic processing of groundnut oil and groundnut meal are included, the NRP of the complete value chain is 110 percent. For sugar and sugarcane the study calculates a NRP of 310 percent and 473 percent respectively. When molasses and ethanol are included the NRP for complete value chain becomes 360 percent and 388 percent respectively.

These results suggest that the GOI has effectively protected the farmers producing these primary crops in this analysis (sugarcane, groundnut, rapeseed). When NRPs are calculated for the entire value chain of the crops, results show that the effective NRPs of farmers increase. This suggests that farmers on average benefited from the creation and/or expansion value chains for their produce. The authors suggest that this is likely due to two main reasons: farmers may receive higher prices for their crops since there is additional value being generated through a larger processed market, and also due to protection of these processed commodities.

In conclusion, measuring distortions along the entire value chain are important for effective policy design. This is because excluding parts of the value chain may overestimate or underestimate the full impact of different policies at different stages of the value chain. Additionally, in an environment of growing demand and limited natural resources, the importance of accurate policy measurement, categorization, and interpretation for the optimal design, monitoring and evaluation of agricultural, environmental, and trade policies is crucial. In this context, further research is recommended to determine which parts of agricultural distortions are due to market failure and to distinguish these from the part that is due to effective policy intervention.

The full study can be accessed here.

By: Fahd Majeed, Simla Tokgoz, and Bas Paris

Photo credit:Flickr, Utpalendra Deka