The Impact of Two-Tier Producer and Consumer Food Pricing in India

India's government buys wheat, rice, and sugar at below themarket price and then sells it in ration shops in the urbanand rural areas. The rest is sold in the open market. This createsa two-tier price system for consumers and producers. Supportersof the government's procurement policy claim that it raisesthe open-market price so much that it increases the sales-weightedaverage of the rationed price and the open-market price; inthat case, both the farm sector as a whole and low-income urbanconsumers with access to the ration shops gain, and high-incomeurban consumers who buy at the open-market price lose. Thisview has provided an intellectual basis for the policy. This article examines a variety of cases: with and without rationing;with rationing through ration cards or queuing; with and withoutaccess by the urban rich to the ration shops; with or withoutfree trade; and with a marketable surplus having either positive,negative, or zero price elasticity. The impact of the policyon the average price is in general ambiguous or negative. Underthe most plausible assumptions, it is negative, implying thatfarmers as a whole lose from the procurement policy.