Production, Procurement and Inflation: A Market Model for Food Grains

Rapid rise in the price of food grains and their continued upsurge is a matter of concern for not only the government and policy makers but also for all concerned with social welfare. This is particularly so because increased prices of basic food item cause great distress to the poor sections of the society who have to spend a large part of their income on food. Quite naturally, understanding the causes of inflation is of high priority for framing the right policy to tackle the problem needs a clear understanding of the factors that led to the price rise. The current study tries to examine how prices get determined in Indian food grains market. This requires a slightly different approach from the conventional demand and supply framework as government intervenes in the market through open market operations. To this end, we propose a structural model, explaining the behavior of food grain prices in the India since 1980-81 through 2011-12 incorporating role of government interventions. Our results confirm that there is strong impact of demand as well as supply side factors. However, when it comes to controlling of inflation, demand side management turn out to be a highly significant. Under supply side management, increased capital stock is found to be effective, as it significantly boosts production and thereby reducing prices and adding to procurement. Whereas government intervention play a stabilizing role.