Managing Food Price Volatility in a Large Open Country : The Case of Wheat in India

India has pursued an active food security policy for many years, using a combination of trade policy interventions, public distribution of food staples, and assistance to farmers through minimum support prices defended by public stocks. This policy has been quite successful in stabilizing staple food prices, but at a high cost, and with potential risks of unmanageable stock accumulation. Based on a rational expectations storage model representing the Indian wheat market and its relation to the rest of the world, this paper analyzes the cost and welfare implications of this policy and unpacks the contribution of its different elements. To analyze alternative policies, social welfare is assumed to include an objective of price stabilization and optimal policies corresponding to this objective are assessed. Considering fully optimal policies under commitment as well as optimal simple rules, it is shown that adopting simple rules can achieve most of the gains from fully optimal policies, with both potentially allowing for lower stockholding levels and costs