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Growth and Welfare Consequences of Rise in MSP

Article  in  Economic and Political Weekly · January 2003

DOI: 10.2307/4413277

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 Special articles
Growth and Welfare Consequences
of Rise in MSP
This note summarises the results of a recently completed study that examined the
consequences of increasing the minimum support price (MSP) of wheat and rice by
10 per cent, with an applied general equilibrium model of India with 65 sectors, and
five rural and five urban expenditure classes. The results show that an increase in the MSP
of wheat and rice leads to decline in overall GDP, increase in aggregate price index
and reduction in investments. Even the increase in agricultural GDP resulting from higher
MSP dwindles rapidly and only a minuscule positive impact on agricultural GDP
remains by the third year. More importantly, in terms of welfare the bottom 80 per cent of
the rural and all of urban population are worse off.
KIRIT S PARIKH, A GANESH-KUMAR, GANGADHAR DARBHA

I The procurement prices are set by the purchasers of food. They are able to buy
Introduction government on the recommendation of less food even when one accounts for
committee on agricultural costs and prices increase in wage rate that may follow higher

T
he mounting food stocks amidst sub- (CACP). The CACP’s recommendations procurement price.
stantial poverty and under-nutrition are based on costs of cultivation and In order to appreciate better the conse-
raise questions on our agricultural adequate return to farmers. Table 1 shows quences of a procurement price hike, it
policy. Government food stocks were 59.1 the CACP recommended prices and the would be instructive to analyse the exact
million tonnes as of November 30, 2001. prices set by the government. For a number quantitative impact of a price hike on the
With the bumper crop in the agricultural of recent years, the government has set growth and welfare of producers and
season July 2001 to June 2002, food stocks prices particularly of wheat, at higher levels consumers. To undertake such an exercise
reached a high of 64.72 million tonnes as than recommended by the CACP. in a credible way, we need a numerical
of June 1, 2002. The existence of such What happens when government in- simulation model that accounts for the
large stocks in a country with 200 million creases procurement prices? High procure- inter-sectoral interactions that one finds in
persons below poverty line is an absurdity. ment price gives farmers an incentive to a modern economy, price determination
The question is why are the stocks mount- produce more. They will use more fertilisers and income distribution mechanisms. This
ing? What is wrong with our policy? and increase yield. But higher price would note summarises the findings of a recently
The main reason for increase in food also reduce demand. To support price, FCI completed study [Parikh et al 2002] that
stocks is related to the government pro- would have to procure more. Stocks would
curement price policy. The problem is the rise further. The government will have to Table 1: Procurement Prices for Fair
level at which the government sets pro- finance the addition to stock. This is done by Average Quality Wheat and Paddy
(Rs/Quint)
curement prices, which have become cutting some other expenditure. The easiest
minimum support prices (MSP) over the to cut is investment. Less would be in- Crop Year Paddy Wheat
CACP Govern- CACP Govern-
years. For many years now these prices vested in agriculture. Irrigation capacity ment ment
have been higher than what free market would not grow as much. In a year or two
prices would have been. The government, the cumulative impact of lower irrigation 1990-1991 205 205 200 215
1991-1992 235 230 225 225
through Food Corporation of India (FCI) would reduce growth rate of agricultural 1992-1993 260 270 245 250
buys up whatever is offered at procure- output despite higher procurement price. 1993-1994 310 310 305 330
ment prices ensuring that the harvest price Farmers themselves could be worse off 1994-1995 340 340 350 350
for a particular commodity does not fall 1995-1996 355 360 360 360
compared to what they could have been
1996-1997 370 380 380 380
below its procurement price. Under the had investment in irrigation not reduced. 1997-1998 415 415 405 475
pressure of the farm lobby the prices are Apart from that consumers and particu- 1998-1999 440 440 455 510
set high. At these prices, what farmers larly the poor consumers may also be hurt. 1999-2000 465 490 490 550
2000-2001 510 510 550 580
produce consumers do not demand for The poor consisting of landless labour, 2001-2002 520 530 580 610
want of adequate purchasing power. small and marginal farmers are net

Economic and Political Weekly March 1, 2003 891

 Table 2: Classification in the Model explores in an integrated way the conse- consumption possibilities and consump-
A: List of Commodities quences of increasing MSP of wheat and tion out of ration shops for some house-
Fixed-output Commodities rice by 10 per cent. hold classes. The later two features are of
1 Rice crucial importance for the purpose on hand
2 Wheat
3 Other Cereals II as the impact of a price hike on different
4 Pulses An Applied General population classes would differ depending
5 Sugarcane upon whether they are net producers or
6 Jute Equilibrium Model of India
7 Cotton consumers of the food commodities, which
8 Tea and Coffee For this purpose we built a dynamic is determined by the proportion of their
9 Rubber applied general equilibrium model for total consumption they buy from ‘home’
10 Other Crops
11 Animal Husbandry India. The model parameters are estimated and ration shops. If a large proportion of
12 Forestry and Logging and the model itself is calibrated for the their consumption is ‘home’ grown and
13 Fishing base year to match the social accounting comes from ‘ration’ shops, an increase in
14 Coal and Lignite
15 Crude Petroleum and Natural Gas matrix (SAM) for 1996-97. A detailed market prices cannot affect their real
16 Iron Ore discussion of the SAM can be found in consumptions and welfare significantly.
17 Other Metallic Minerals Ganesh-Kumar and Darbha (1998). The However, the levels of home grown and
18 Non Metallic Minor Minerals
19 Sugar SAM, besides accounting for all the inter- ration consumption would themselves be
20 Khandsari sectoral and agent transactions for a given affected by the equilibrium prices prevail-
21 Edible Oils year, is made consistent with a demand ing in the economy and hence a model that
Flexible-output Commodities
22 Other Food and Beverages system estimated over various consump- attempts to capture the welfare impacts of
23 Cotton Textiles tion and commodity classes. 1 Other a price hike must explicitly account for the
24 Woolen Textiles notable features of the model are: endog- endogenous determination of different
25 Silk Textiles
26 Art Silk and Synthetic Textiles enous determination of level of stocks components of household consumption.
27 Jute Hemp Mesta Textiles within the model without imposing any Our model accounts for these [for the
28 Readymade Garments arbitrary stock limits, self or home grown technical details see Parikh et al 2002].
29 Other Textiles
30 Wood and Wood Products Table 3: Macro Indicators
31 Paper and Paper Products
32 Leather and Leather Products 1997 1998 1999 2000
33 Rubber Products
34 Plastic Products GDP at factor cost (Rs million)
35 Petroleum Products REF 11497726 12235821 12923826 13561795
36 Fertilisers* MSP10_LLA 0.00 -0.11 -0.07 -0.33
37 Pesticides GDP agriculture (Rs million)
38 Synthetic Fibre and Resin REF 3085217 3298892 3457717 3575781
39 Paints Drugs Cosmetics MSP10_LLA 0.00 0.00 0.46 0.03
40 Other Chemicals GDP non-agriculture (Rs million)
41 Cement REF 8412509 8936930 9466110 9986014
42 Other Non Metallic Mineral Products MSP10_LLA 0.00 -0.15 -0.26 -0.45
43 Iron and Steel GDP at market prices (Rs million)
44 Non Ferrous Metals REF 12767350 13524401 14293975 15028997
45 Tractors and Other Agricultual Machinery MSP10_LLA 0.00 -0.09 -0.08 -0.35
46 Other Non Electrical Machinery Total savings (Rs million)
47 Electrical Machinery REF 3479866 3512898 3729888 4017305
48 Communication and Electronic Equipment MSP10_LLA 0.00 0.83 0.66 -0.42
49 Rail Equipment Total fixed investments (Rs million)
50 Motor Vehicles REF 3325974 3349796 3538453 3861674
51 Motorcycle Scooter and Bicycles MSP10_LLA 0.00 -0.12 -0.83 -1.88
52 Other Transport Equipment Net stock purchase (Rs million)
53 Other Manufacturing REF 153918 163101 191438 155612
54 Construction MSP10_LLA 0.00 20.30 28.29 35.65
55 Electricity* Consumer price index
56 Gas REF 100.0 92.4 92.9 101.6
57 Water Supply MSP10_LLA 0.00 1.64 1.70 0.94
58 Rail Transport Service* Producer price index
59 Other Transport Service REF 100.0 92.3 94.3 105.6
60 Communication MSP10_LLA 0.00 1.63 1.71 0.99
61 Trade Agricultural investments share in total investments (per cent)
62 Financial Services REF 8.57 8.57 8.45 8.43
63 Social Services MSP10_LLA 0.00 0.00 0.40 0.49
64 Public Administration Agricultural investments (Rs million – at current prices)
65 Other Services REF 285041 282577 296916 343508
MSP10_LLA 0.00 0.02 -0.28 -4.56
B: Agents Gross irrigated area (000 hectares)
Households and Government. REF 73275 75075 75385 77852
> Households classified based on location into MSP10_LLA 0.00 0.00 0.01 -0.14
Rural and Urban. Gross cropped area (000 hectares)
Within Rural and Urban – five household classes REF 189543 189517 190011 191762
based on annual per capita real expenditure. MSP10_LLA 0.00 0.00 0.00 -0.03
Class limits: 0 to 1,800; 1,801 to 3,600; 3,601 to Notes: 1 The figures for REF are in levels (units for each variable indicated in brackets).
7,200; 7,201 to 21,600; 21,601 and above. 2 All rupee valued variables are at constant prices unless mentioned otherwise.
3 The figures for MSP10_LLA are percentage change over REF levels.
Notes: * These commodities have administered
4 Agriculture’s share in total fixed investments are at current prices.
prices for all type of transactions.

892 Economic and Political Weekly March 1, 2003

 In the model the economy is characterised
by 65 commodity producing sectors and
10 types of households classified first by
their location of residence into two broad
groups – rural and urban and within each
of them into five classes based on their
annual per capita real expenditure (Table 2).
The model is sequentially dynamic in the
sense that it is solved for every year in a
sequential manner with the previous year’s
solution providing a starting value for the
next year. The policy shock that we analyse
is a one time 10 per cent hike in procure-
ment price of wheat and rice.
III
The Scenarios
Policy analysis using a model requires
specification of the prevailing and changed
policy regimes. To facilitate comparison
a base/reference scenario is first generated
and the outcomes of policy scenarios are
compared with that of reference scenario.
The reference scenario, labelled ‘REF’,
against which policy scenarios are com-
pared, is a business-as-usual scenario in
which the policy environment specified in
the model corresponds to the actual policies
observed during the base period, 1996-97.
The policy scenario is designed as a one
time increase by 10 per cent in the support
price of these two commodities in the
second year, with all other parameters kept
at their base scenario levels. That is, the
government assures the producers of rice
and wheat a 10 per cent higher price by
committing to buy whatever amounts of
these two commodities that they may offer
for sale. Given fixed rates of trade and
transport margins and indirect tax/subsi-
dies on these two commodities, this hike
in procurement price and hence producer

Table 4: Agricultural Commodities

Rice Wheat Other Cereals Grams and Pulses Other Crops
REF MSP10_LLA REF MSP10_LLA REF MSP10_LLA REF MSP10_LLA REF MSP10_LLA

Private consumption – total (million quintal)

1997 625.0 0.0 521.4 0.0 307.2 0.0 103.5 0.0 5526.2 0.0
1998 646.5 –3.4 539.3 –3.4 365.5 0.0 108.1 0.1 6299.0 0.0
1999 675.1 –3.1 563.2 –3.1 375.9 0.0 112.9 0.0 6707.1 0.1
2000 712.2 –3.6 594.2 –3.6 390.1 –0.2 113.3 0.3 7245.0 0.1
Private consumption – subsistence (million quintal)
1997 154.9 0.0 148.3 0.0 91.5 0.0 20.2 0.0
1998 339.9 0.0 335.0 0.0 54.2 0.0 59.6 0.0
1999 355.6 4.3 364.2 2.9 54.3 3.0 59.1 1.9
2000 364.7 2.6 379.1 1.9 56.2 3.0 59.6 2.4
Private consumption – ration (million quintal)
1997 70.5 0.0 36.7 0.0 21.5 0.0
1998 99.4 –5.9 73.8 –15.6 15.5 0.0
1999 92.3 0.7 54.7 –30.2 15.2 –0.7
2000 92.9 3.2 53.7 –26.6 14.8 0.7
Private consumption – market (million quintal)
1997 399.5 0.0 336.4 0.0 194.2 0.0 83.3 0.0 5526.2 0.00
1998 207.2 –7.7 130.5 –5.2 295.7 0.0 48.6 0.0 6299.0 0.04
1999 227.2 –16.2 144.3 –8.3 306.4 –0.5 53.8 –2.0 6707.1 0.07
2000 254.6 –14.9 161.4 –8.9 319.0 –0.8 53.6 –1.9 7245.0 0.05
Final stocks (million quintal)
1997 166.9 0.0 147.7 0.0 70.2 0.0 0.9 0.0 2262.5 0.0
1998 170.2 12.9 167.5 11.0 72.3 0.0 3.2 0.0 2288.9 0.0
1999 196.0 28.6 234.3 23.3 74.3 0.0 2.3 0.0 2315.2 0.0
2000 205.7 43.4 295.2 25.8 75.6 0.9 2.3 0.0 2341.5 0.0
Domestic production (million quintal)
1997 817.7 0.0 694.0 0.0 340.9 0.0 142.5 0.0 11181.2 0.0
1998 846.5 0.0 733.1 0.0 401.3 0.0 150.4 0.0 12303.7 0.0
1999 908.4 1.6 819.7 2.6 413.2 0.0 151.9 0.0 12990.8 0.0
2000 931.8 0.0 853.3 0.0 428.2 0.1 153.5 0.3 13826.8 0.0
Producer price (Rs per quintal)
1997 1014.0 0.0 584.0 0.0 549.0 0.0
1998 1014.0 10.0 584.0 10.0 384.6 0.2
1999 1014.0 10.0 584.0 10.0 385.0 0.1
2000 1014.0 10.0 584.0 10.0 388.8 –0.6
Consumer ration price (Rs per quintal)
1997 1096.6 0.0 631.8 0.0 593.7 0.0
1998 1093.9 8.4 630.3 8.4 444.3 0.1
1999 1095.0 8.4 630.9 8.4 445.2 0.2
2000 1108.1 7.6 638.1 7.7 456.0 –1.3
Clearing price (Rs per quintal)
1997 1906.6 0.0 100.0 0.0
1998 1857.0 0.0 77.3 0.1
1999 1857.0 0.0 71.0 –0.1
2000 2203.6 –4.2 63.2 –0.8
Consumer price (Rs per quintal)
1997 1198.0 0.0 690.2 0.0 648.6 0.0 2114.7 0.0 134.1 0.0
1998 1195.3 8.5 688.7 8.5 482.7 0.2 2062.1 0.0 108.7 0.1
1999 1196.4 8.5 689.3 8.5 483.7 0.2 2063.4 0.0 101.8 0.0
2000 1209.5 7.8 696.5 7.9 494.9 –1.3 2424.8 –4.1 95.0 –1.5

Notes: 1 The figures for REF are in levels (units for each variable indicated in brackets).
2 The figures for MSP10_LLA are percentage change over REF levels.
3 For Other Crops, the units for consumption, stocks and production are in 100 million rupees @ 1996-97 prices.

Economic and Political Weekly March 1, 2003 893

price will translate into a commensurate GDP is marginally higher. This increase declines. The decline in fixed investments
rise in both their market price and the in agricultural GDP is, however, insuffi- is due to the additional expenditure that
ration price. cient to compensate for the fall in non- the government incurs to support the hike
agricultural GDP and consequently, total in procurement prices. This additional
IV GDP is lower in all the years. expenditure arises due to both an increase
Results The fall in non-agricultural GDP is in procurement prices as well as the quan-
attributable to the decline in aggregate tity procured. Given the overall resource
Macro Impacts demand due to rise in the overall price constraint, the additional expenditure on
indices and decline in total fixed invest- building up stocks comes at the cost of a
A hike in procurement prices of rice and ments in the economy. The rise in overall decline in fixed investments. While the
wheat results in a marginal decline in total price indices to the tune of 1 to 1.5 per cent additional expenditure on stocks favours
GDP (at constant prices) in the first year leads to a general reduction in real incomes only rice and wheat, the decline in fixed
of the price hike, because of a fall in GDP and hence demand. Non-agricultural out- investments adversely affects the demand
non-agriculture (Table 3). Agricultural put being demand determined consequently for many non-agricultural sectors, and
hence the decline in non-agricultural GDP.
Table 5: Distributional Changes The decline in overall investments re-
Class Population (million) Per Capita Equivalent Income (Rs) sults in decline in agricultural investment
1997 1998 1999 2000 1997 1998 1999 2000 also despite the higher relative price of
Rural
agriculture. This is felt in terms of virtually
≤ 1800 insignificant growth in gross irrigated area
REF 17.6 14.1 6.7 2.8 1473 1502 1305 1110 and gross cropped area, and hence agri-
MSP10_LLA 0.0 0.0 34.3 78.6 0.0 -0.9 4.5 8.7
≤ 3600
cultural GDP and in the later years, despite
REF 108.9 97.9 64.0 38.1 2835 2884 2499 2138 a favourable shift in relative prices to-
MSP10_LLA 0.0 0.0 13.3 35.2 0.0 -0.7 4.2 9.0 wards agriculture.
≤ 7200
REF 258.1 255.5 224.6 185.7 5352 5410 4701 4058 Thus from a macro perspective, the results
MSP10_LLA 0.0 0.0 -0.5 6.7 0.0 -0.5 2.6 7.0 indicate that the policy to hike procure-
≤ 21600 ment prices of rice and wheat has an adverse
REF 278.0 303.5 368.0 422.9 11542 11587 10304 9158
MSP10_LLA 0.0 0.0 -3.8 -6.4 0.0 -0.2 0.2 3.2 impact on overall growth, raises the level
> 21600 of inflation, reduces investment, and has
REF 23.7 29.0 50.8 78.9 29412 29070 25666 22772 a minuscule impact on agricultural GDP.
MSP10_LLA 0.0 0.0 8.1 -1.3 0.0 0.2 -1.8 0.9
Urban
≤ 1800 Impact on Agricultural
REF 2.1 1.5 0.7 0.2 1494 1476 1272 1077 Production, Consumption
MSP10_LLA 0.0 0.0 42.9 150.0 0.0 -1.8 6.4 12.6
≤ 3600 and Stocks
REF 18.5 15.4 9.0 4.7 2920 2854 2459 2089
MSP10_LLA 0.0 0.0 22.2 51.1 0.0 -1.7 4.8 10.4 With the hike in prices of rice and wheat,
≤ 7200
REF 65.1 60.7 47.3 34.4 5468 5408 4684 4028 the output of these sectors increase by 1.6
MSP10_LLA 0.0 0.0 3.6 15.7 0.0 -1.5 2.5 7.1 and 2.6 per cent, respectively, only in the
≤ 21600
REF 123.8 131.2 141.2 145.8 12293 12287 10910 9685
year immediately following the price hike
MSP10_LLA 0.0 0.0 -3.8 -4.0 0.0 -1.2 -0.8 2.1 (Table 4). This increase in output is not
> 21600 sustained over time because of the fall in
REF 24.2 29.5 44.9 62.9 31460 31388 28096 25246
MSP10_LLA 0.0 0.0 3.3 -3.8 0.0 -0.9 -2.1 0.3
agricultural investments and irrigated area
seen earlier. The hike in procurement prices
Notes: 1 The figures for REF are in levels, units for each variable indicated in brackets. results in increase in all prices – producer,
2 The figures for MSP10_LLA are percentage change over REF levels.
ration as well as consumer prices, as
explained earlier. This in turn, leads to a
Table 6: Willig-Bailey Welfare Comparisons significant decline in total private con-
Population 1998 1999 2000 sumption of these two commodities by
Proportion REF MSP10_LLA REF MSP10_LLA REF MSP10_LLA around 3 to 3.5 per cent. Indeed self-
Rs Per Per Cent Change Rs Per Per Cent Change Rs Per Per Cent Change
Capita over REF Capita over REF Capita over REF
consumption of both these commodities is
higher while the ration and the market
Rural consumption are lower in response to
0.2 2915 -0.69 2951 -0.39 2988 -0.59
0.4 3944 -0.57 4071 -0.69 4243 -1.29 increase in prices. The increase in output
0.6 5135 -0.47 5383 -0.77 5468 -0.57 along with a decline in consumption re-
0.8 6595 -0.35 6709 -0.57 6692 -0.11 sults in a build up of stocks of these two
1.0 8636 -0.23 8851 0.00 8934 0.12
Urban
commodities. For rice, stocks are larger by
0.2 3793 -1.61 3951 -2.02 4109 -1.48 12.9, 28.6 and 43.4 per cent for the years
0.4 5459 -1.48 5635 -1.73 5691 -1.40 1998, 1999 and 2000 respectively com-
0.6 7162 -1.36 7259 -1.63 7274 -1.35 pared to the REF. For wheat these are
0.8 8865 -1.29 8882 -1.57 9333 -2.07
1.0 12222 -1.14 12532 -1.19 12696 -1.34
larger by 11.0, 23.3 and 25.8 per cent,
respectively. The combined stocks of rice

894 Economic and Political Weekly March 1, 2003

and wheat at the end of three years come
to around 66.6 million tonnes compared to
50.1 million tonnes in the REF. The effects
of an increase in relative prices of rice and
wheat on output, consumption and stocks
of other agricultural commodities are
quantitatively marginal.
Welfare Impacts
The cross-sectional impact of the price
hike in terms of distribution of population,
income and welfare is instructive. There
is a significant increase in the population
in the poorer classes, both in rural and
urban areas (Table 5). Willig-Bailey com-
parison2 of the two income distributions
under assumptions of Pareto principle,
anonymity and aversion to regressive trans-
fers, clearly indicates a significant wors-
ening of welfare of 80 per cent of popu-
lation in rural areas and all persons in
urban areas with higher MSPs (Table 6).
Further, the welfare loss is in general larger
for urban population than for rural popu-
lation across classes and over time. The
welfare loss is in general regressive in the
sense that the lower classes seem to lose
more than the upper classes. Only the top
20 per cent of the rural population expe-
rience welfare increases in the third year.
It should be emphasised that rural popu-
lation get part of their income from non-
agricultural activities. Thus the decline in
non-agricultural output affects adversely
the income of rural population also, which
to some extent neutralises the gains from
increase in agricultural prices. The top
quintile of rural population has a larger
marketable surplus of wheat and rice and
they also get a relatively larger share of
non-agricultural income.
While the immediate welfare loss due
to a general price hike (procurement, ration
and market price) is obvious, the welfare
loss over time can be explained in terms
of the decline in overall GDP attributable
to a decline in non-agricultural GDP and
mild growth in agriculture output as the
decline in fixed investments almost com-
pletely offsets the incentive effects of
higher MSPs.
V posed subscription agents in India have not been forwarded to us.
Conclusions
We have seen that a 10 per cent increase
in minimum support prices of wheat and
rice leads to decline in overall GDP by 0.33
per cent, increase in aggregate price index
by 1.5 per cent, reduction in investments
Economic and Political Weekly March 1, 2003
View publication stats
by 1.9 per cent and a minuscule impact on and urban expenditure classes from the under-
agricultural GDP by the third year. What lying commoditywise Engel curves following
the procedure of Fischer et al (1988) as modified
is more important to note is that in terms by Ganesh-Kumar and Darbha (1996). An
of welfare the bottom 80 per cent of the additional restriction is specified to ensure that
rural and all of urban population is the commodity demands projected from the
worse off. classwise LES are consistent with the observed
The results are easy to understand. Higher total private consumption demand in the SAM.
For more details see Ganesh-Kumar and Darbha
minimum support prices reduce demand (1996) and Ganesh-Kumar et al (1998).
and lead to larger stocks. Thus the stocks 2 The Willig and Bailey (1981) approach takes
of wheat and rice are larger by 16.5 million into account changes in both the population
tonnes after three years and reach 66.5 proportions and equivalent incomes across
million tonnes compared to a reference classes and permit us to compare alternative
income distributions, under assumptions of
scenario. We have assumed that a govern- Pareto principle, anonymity and aversion to
ment under hard budget constraints can regressive transfers. They compare the average
finance the expenditure on additional stocks per capita equivalent incomes of bottom
only by reducing its investment expendi- X per cent of the population for all X from
ture, including investment in irrigation. 0 to 100. When one policy scenario shows
higher equivalent incomes for all values of X,
We consider this to be a realistic assump- we can say that it represents a superior welfare
tion. This leads to lower agricultural output situation.
overtime and even the farmers get hurt.
Thus the minimum support prices at References
levels much above market clearing prices
are not desirable. One should emphasise Fischer, G, K Frohberg, M A Keyzer and K S Parikh
here that the adverse impact of increases (1988): Linked National Models: A Tool for
in MSP is related to the level of MSP to International Food Policy Analysis, Kluwer
Academic Publishers, Dordrecht.
begin with. Only when the increases push Ganesh-Kumar, A and G Darbha (1996): ‘Engel
up prices above the market clearing prices Curve Based Linear Expenditure Demand
that the problems arise. Thus we conclude System’, paper presented at the 32nd Indian
that government should announce mini- Econometric Society Conference, Bangalore,
mum support prices that remain below the March 21-23, 1996.
market clearing prices in a normal or modal Ganesh-Kumar, A, G Darbha and K S Parikh
(1998): ‘Impact of a Hike in the Administered
year. In an exceptionally bumper year the Prices of Petroleum Products: Analysis Using
market clearing prices would be lower an Applied General Equilibrium Model for
than the announced MSPs. This, however, India’, Discussion Paper No 150, Indira Gandhi
is fine as in such years the farmers need Institute of Development Research, Mumbai.
support which should be provided. EPW Parikh, Kirit S, A Ganesh-Kumar and G Darbha
(2002): ‘Growth and Welfare Consequences
of a Rise in Minimum Support Prices: An
Address for correspondence: Applied General Equilibrium Analysis for
Kirit@igidr.ac.in India’, report submitted the Department of
Economic Affairs, Ministry of Finance,
Notes Government of India.
Willig, R D and E E Bailey (1981): ‘Income
Distribution Concerns in Regulatory Policy
1 In the model, households’ consumer behaviour
is characterised by linear expenditure demand Making’ in Fromm G (ed) Studies in Public
systems (LES). The demand system parameters Regulation, University of Chicago Press,
are estimated separately for each of the rural Chicago.
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