Frictions in Food-grain Market : An Impact Assessment Using a DSGE Model

In India, frictions in foodgrains market tend to influence the output and price trajectories significantly. The paper uses a dynamic stochastic general equilibrium (DSGE) model to examine the behaviour of the key agents in the foodgrains market in response to a major policy intervention in the form of announcement of minimum support prices (MSPs) by the Government before every kharif and rabi season. The paper recognizes that the impact of MSP on food inflation depends not only on the procurement policy (direct demand channel) but also on its interaction with a host of other factors such as government expenditure on food management (indirect demand channel), buffer stock dynamics (artificial scarcity channel) and the response of private players in the supply-chain (wholesale traders channel). The model-based historic decomposition of the foodgrain output and inflation suggest that the low food (cereal) inflation especially since 2014-15, is mainly explained by the favourable productivity and input cost shocks