TERM PAPER

“Managerial
Economics”
“Analysis of demand and
supply of rice in India and
income, demand and cross
price elasticity related to
it”

SUBMITTED TO
SUBMITTED BY
NEHA SHANDILYA
NAVNEET BHARDWAJ

FACULTY
SEC. - R1001

ROLL NO.-A17

REG. NO.-11006438

AKNOWLEDGEMENT
The most precious moments are those when we get an
opportunity to remember and thank everyone who has in some
way or the other motivated and facilitated us to achieve our
goals.

First of all I thank God almighty for giving me his blessings. I

thank to my entire teaching community and all friends for being
as motivating force behind me all the time I needed them.

I also thank my family and dear ones who stood behind me to

support me and giving me their precious time and attention.

Thank you very much.

NA
VNEET BHARDWAJ
CONTENTS
 Abstract of case
 Introduction
 Demand and Supply of
rice in India
 Factors affecting price of
rice
 Demand elasticity of rice
 Income elasticity of rice
  Cross price elasticity of
rice
 Conclusion
 Research Methodology
 Bibliography

ABSTRACT OF THE TOPIC

The topic of my term paper is “Analysing the demand and
supply of rice in India and the demand elasticity, income and
cross price elasticity pertaining to the commodity”.

Rice is emerging as a vital export item after the

opening up of agriculture market in India. To formulate
effective macro economic policy for ensuring both export and
domestic consumption of rice, it becomes imperative to
understand the dynamics of rice demand and supply.
Acknowledging the fact that demand for rice is dependent upon
overall consumption fund and other consumption needs of a
given household we have employed the theoretical framework
of Almost Ideal Demand System (AIDS) to formulate our
household demand. Similarly it is also important to understand
the supply elasticity of rice so that direction of supply with the
implementation of agricultural trade policy can be examine.
Using these elasticity’s, an effort is made to understand the
possible impact of a price change consequent upon opening up
of the rice market on rice demand and supply.

I have taken two states in India, namely Andhra

Pradesh and West Bengal for the analysis since they are the
two major rice producers in India and rice has the biggest share
in the consumption basket of households in these two states.

INTRODUCTION
Rice is a very important food source commodity. As the second
most produced food in the world, rice is a cereal grain that is
grown as a staple. Rice can be grown nearly anywhere. The
three largest exporters of rice are the United States, Thailand
and Vietnam. Rice is a crop that is best grown where there is a
low cost of labour and high levels of rain as rice is a labour
intensive crop and requires plenty of water to grow. Rice grains
are milled to remove the outer husk, called the chaff. At this
stage it is referred to as brown rice. Further processing to
remove the bran, residue and germ make it into white rice,
commonly found in stores.
Rice Commodity Research & Analysis Report
Rice is the second most produced food in the world. Rice is a
cereal grain grown as a staple food for much of the world’s
population. Rice Fundamental Commodity Analysis (short term
investment): Rice is rated a sell; although World Wealth could
not find adequate publicly traded companies to indicate the
true potential of rice. Rice Value Investor Survey (long term
investment): Rice has an average growth potential as per the
investor survey results.

Rice SWOT Analysis

Strength: Rice is the number one staple food source for much
of the world. Weakness: There is little tradable supplies of
crops, so forming an international market for rice is difficult.

Opportunity to grow: Rice may become more popular as

Asian cuisines increase in popularity worldwide.

Threats to growth: High recent farming cost could lower the

profitability of commodities.

Rice Trade Analysis

The commodity analysis sell rating indicates that rice should
decrease in price over the short term, whereas an average
investor survey means rice may stay the same in price over the
long term.

India Country & Currency Analysis Research Report

India (INR) has a highly regulated economy. However, recent
liberalization has transformed the economy towards a
capitalist, market-based system.

India's Fundamental Currency Analysis (short term investment):

India’s currency is fairly valued with very low investment flow
potential combined with very high purchase price parity
potential.

India's Value Investor Survey (short term investment): India’s

economic environment is unfavourable for long term economic
growth due to low scores on economic freedom, transparency,
economic diversity, and the SWOT analysis.

India's General Trading Partners: Belgium, Pakistan,

the UK, Japan, and the US are the top export partners. India's
Commodity Trading Partners: India produces a significant
amount of staples for domestic use and needs to import
energy.

SWOT Analysis of India

The leading Indian strength is their supply of natural resources,

while the main weakness is a lack of infrastructure. India's
Currency Trading Strategy: A fairly-valued currency, very low
investment flow potential and an unfavourable business
environment leads to a negative outlook for Indian
investments.

Industry Investment Impact

The total factor productivity (TFP) of rice grown in various
regions of India and examines the sources of productivity
growth and marginal rates of return to public investment in rice
research. The paper also projects the supply and demand of
rice in the 21st century in India. The results of the study
highlight a spectacular increase in rice yield from 1.1 t ha-1 in
1967-71 to 1.9 t ha-1 in 1997-99. The TFP index has risen at
0.9% per annum and has contributed one-third of production
growth. A decelerating tendency in TFP growth is observed. The
cost per unit of rice has declined steadily. The cultivation of
basmati rice has benefited farmers in the northern states of
India. Demand for rice will be met in the future with a marginal
surplus for trade. To maintain the surplus status of rice, the
study emphasizes the need to strengthen efforts to increase
production by maintaining or increasing TFP through public
investment in irrigation, infrastructure development, research,
and efficient input use. More than half of the required growth in
yield to meet the demand target must be met from research
efforts in developing location-specific and low-input-use
technologies with emphasis on the regions where current yield
is below the required national average yield. All efforts need to
concentrate on accelerating growth in TFP while conserving
natural resources and promoting the ecological integrity of the
agricultural system.

POSITION OF RICE IN CURRENT YEAR

Rice strengthened in the wholesale grains market in current
year first quarter on increased off take by stockists and local
parties. However, other commodities continued to be traded in
a limited range on some deals.

Market men said, the pick up in demand from rolling flour mills
and local parties helped rice prices to recover.

In the rice section, Permal raw new, Sela and rice IR-8 traded
higher at Rs 1145-1170, Rs 1450-1500 and Rs 1100-1120 per
quintal respectively. The following were quotations per quintal:
In thin trading, non-basmati rice prices declined in the
wholesale grains market on Saturday on increased offerings by
stockists against sluggish demand.

Traders said stockists selling against reduced demand mainly

pulled rice prices down. In the rice section, Permal raw lost Rs
35 at Rs 1100-1160 per quintal while Sela lost Rs 40 at Rs
1430-1500 a quintal. Rice IR-8 traded Rs 20 down at RS 1000-
1030 a quintal for want of support.

Rice basmati (lal quila) at Rs 5000/quintal, Shri Lal Mahal at Rs

4800/quintal, Basmati common 3850-4050, Permal raw new
1145-1170, old 870-900, Permal wand 1260-1325, Sela 1450-
1500 and rice IR-8 1100-1120.

DEMAND OF RICE

India's demand for rice is projected to rise to 211 million tonnes

in 2020 from an estimated 132 million tonnes in 2000 and
when combined with feed use it will be around 260 million
tonnes.

For the study purpose, I have taken demand of rice for

the state West Bengal and Andhra Pradesh into
consideration.

In Indian agriculture rice holds a special place, being suited to

the soil and climate of the country more importantly, being a
labour intensive crop, rice absorbs a large section of the rural
labour force and in that sense is a dominant source of
employment in the country. Above all, several studies have
demonstrated India’s comparative advantage in rice and under
the given conditions the prospect of rice export. True to this
hypothesis rice has emerged as a prominent export item with
the initiation of economic reforms. Until Recently, export in
India was a residual in nature, so the demand projections will
enable us to determine the export potentiality of some
commodities. Given this background I have tried to examine
the potentiality of surplus generation from two large rice
producing states (Andhra Pradesh & West Bengal). In the
liberalized economy the demand projections will give us an idea
about the future domestic demand of food. As the economy is
opening up the price levels and income levels are changing. In
this changing scenario the demand elasticity will help us to get
an idea about future trend of demand of some important food
items. Ultimately the elasticity will help us to get an idea
regarding the availability of surplus rice in future which can be
exported.

In this paper I have tried to estimate the demand elasticity of

rice in West Bengal and Andhra Pradesh using secondary data.
Actually, Andhra Pradesh and West Bengal are two large
producers of rice producing approximately 10.14% and 16.61%
of total production of rice in India respectively. This paper is an
exercise to estimate demand elasticity of rice in two states of
India and also income elasticity and cross price elasticity of rice
taking into consideration cost of production. The purpose is to
understand what might happen to demand for rice once the
rice market is opened up to global competition and also to
determine the income elasticity and cross price elasticity so
that we can determine the potential for surplus from these two
states.

Factors that affect Rice Prices are as follows

• Weather: Role of weather in rice production is immense.

Temperature, rainfall and soil moisture are the important
parameters that determine the crop condition. Further, natural
calamities can also affect crops. Markets keep watch of these
developments.
• Minimum Support Price: Changes in the minimum support
prices (MSP) by the government also have immense impact on
the price of rice.

• Government policies: Exchange rates, Fiscal policies,

Export incentives and export promotion also influence price.

• Substitute Product: Availability of substitute products at

cheaper rate may lead to weakness in demand. This situation
happens especially when the main products price tends to
become higher.

• Consumption: Rice consumption depends on two factors -

population and income. Let’s take for example Asia. Rice is the
staple food of Asia. Low-income groups consume more rice
according to the per capita income increase. But as the income
increases, there arrives a point when the consumption starts to
dip. Income growth and reduction in population result in a low
consumption of rice.

• Seasonal cycles: Seasonal cycles are present in rice

cultivation. Price tends to be lower as harvesting progresses
and produce starts coming into the market. At the time of
sowing and before harvesting price tends to rise in view of tight
supply situation.

• Demand: Import demands as well as domestic demand.

• Breakthrough in the technology may increase the productivity

and would lead to more supply. This may bring some softness
in the price.

From a nation dependent on food imports

to feed its population, India today is self-sufficient in grain
production and also has a substantial reserve. The progress
made by agriculture in the last four decades has been one of
the biggest success stories of free India. Agriculture and allied
activities constitute the single largest contributor to the Gross
Domestic Product, almost 33% of it. Agriculture is the means of
livelihood of about two-thirds of the work force in the country.

India is the world's second largest rice producer, followed by

China. The production of rice in India has shown an increasing
trend which is evident from the Table given below:

YEAR PRODUCTION (in million tonnes)

1948-49 53.63
1958-59 74.29
2968-69 82.54
1978-79 86.08
1988-89 89.68
1998-99 84.98
2008-09 93.08

The demand for rice in India is projected at 128 million tonnes

for the year 2012 and will require a production level of 3,000
kg/hectare significantly greater than the present average yield
of 1,930 kg/hectare. Government of India is targeting to
achieve production of 129 million tonnes of rice by 2011-12
with the growth rate of 3.7% along with other foodgrains.

Major State Production of Rice in India

Production (in million tonnes)

State 2006-07 2003-04
Uttar Pradesh 42.32 45.65
Punjab 25.32 25.20
Andhra Pradesh 14.53 13.70
West Bengal 13.83 14.92
 Haryana 13.25 13.06
Bihar 12.06 14.39
Karnataka 10.95 9.86
Maharashtra 10.08 12.70
Rajasthan 10.04 10.68
Madhya Pradesh 8.93 21.27
Tamil Nadu 8.90 8.97
Orissa 4.98 5.62
Assam 4.17 4.04
Gujarat 3.68 4.05
Chhattisgarh 3.65 -

Minimum support price of rice (Rs/quintal):

Year Common % Change Permal Sela Basmati

1994-95 340 9.7 360 380 -
1995-96 360 5.9 375 395 -
1996-97 380 5.6 395 415 -
1997-98 415 9.2 - - 455
1998-99 440 6.0 - - 470
1999-00 490 11.4 - - 520
2000-01 510 4.1 - - 540
2001-02 530 3.9 - - 560
2002-03 530 - - - 560
2003-04 550 3.8 - - 580
2004-05 560 1.8 - - 590
What is price elasticity of demand???
Price elasticity of demand (PED or Ed) is a measure used in
economics to show the responsiveness, or elasticity, of the
quantity demanded of a good or service to a change in its price.
More precisely, it gives the percentage change in quantity
demanded in response to a one percent change in price
(holding constant all the other determinants of demand, such
as income).

Price elasticity is almost always negative, although analysts

tend to ignore the sign even though this can lead to ambiguity.
Only goods which do not conform to the law of demand, such
as Giffen goods, have a positive PED. In general, the demand
for a good is said to be inelastic (or relatively inelastic) when
the PED is less than one (in absolute value): that is, changes in
price have a relatively small effect on the quantity of the good
demanded. The demand for a good is said to be elastic (or
relatively elastic) when its PED is greater than one (in absolute
value): that is, changes in price have a relatively large effect on
the quantity of a good demanded.

Different degrees of elasticities of demand

• Perfectly elastic demand

In this elasticity is equal to infinity, i.e. Ep=∞.in this
case unlimited quantity of commodities can be sold at
the prevailing price and even a negligible increase in
price would result in zero quantity demanded.

• Highly elastic demand

When proportionate change in quantity demanded is
more than a given change in price, the commodity is
regarded to have a highly elastic demand. In this Ep>1.

• Unitary elastic demand

When a given proportionate change in price brings
about an equal proportionate change in quantity
demanded, then demand for commodity is regarded as
unitary elastic. In this Ep=1.

• Relatively inelastic demand

When change in quantity demanded is found to be
offset by change in its price, then the commodity has a
relatively in elastic demand. In this Ep<1.
 • Perfectly inelastic demand
In this case the quantity demanded of a commodity
remains the same, irrespective of any change in the
price, i.e. quantity demanded is totally unresponsive to
changes in price. In this Ep=0.

Revenue is maximised when price is set so that the PED is

exactly one. The PED of a good can also be used to predict the
incidence (or "burden") of a tax on that good. Various research
methods are used to determine price elasticity, including test
markets, analysis of historical sales data and conjoint analysis.
PED is derived from the percentage change in
quantity (%ΔQD) and percentage change in price
(%ΔP).
Price elasticity of rice
Price elasticity is the measurement of change in demand of a
particular commodity in respect of the change in its price. Price
elasticity of rice will measure the change in the demand of rice,
in respect of the change in its price.

 In Andhra Pradesh-

Andhra Pradesh is a state situated on the south eastern

coast of India. It is India's fourth largest state by area and
fifth largest by population. Its capital and largest city is
Hyderabad.

Andhra Pradesh is historically called the "Rice

Bowl of India". More than 77% of its crop is rice. Andhra
Pradesh produced 17,796,000 tonnes of rice in year 2009.

Price of rice- Rs 1430/qn Original

demand-82%
New price- Rs 1480/qn New demand-
77%

By putting the above figures in the formula, we get:-

Price elasticity of rice=1.43

Ep=1.43

Price elasticity of rice is relatively inelastic.

Note-The above calculation is for the Sela variety of rice

and the figures are taken on an approximate basis.

 In West Bengal-

Price of rice-Rs 4730/qtl

Original demand-76%

New price- Rs 4755/qtl New

demand-74%

By applying the same formula we get-

Price elasticity of rice=3.84

Ep=3.84

Price elasticity of rice is relatively inelastic.

Note-The calculation is done for basmati variety of rice

and the figures are taken on an approximate basis.
What is income elasticity???
In economics, income elasticity of demand measures the
responsiveness of the demand for a good to a change in the
income of the people demanding the good, holding all prices
constant. It is calculated as the ratio of the percentage change
in demand to the percentage change in income. For example,
if, in response to a 10% increase in income, the demand for a
good increased by 20%, the income elasticity of demand would
be 20%/10% = 2.

Types of income elasticises

Income elasticity can be of three types, namely:-

1) Negative income elasticity

2) Positive income elasticity

3) Zero income elasticity

A negative income elasticity of demand is

associated with inferior goods; an increase in income will lead
to a fall in the demand and may lead to changes to more
luxurious substitutes.

A positive income elasticity of demand is

associated with normal goods; an increase in income will lead
to a rise in demand. If income elasticity of demand of a
commodity is less than 1, it is a necessity good. If the elasticity
of demand is greater than 1, it is a luxury good or a superior
good.

A zero income elasticity (or inelastic) demand

occurs when an increase in income is not associated with a
change in the demand of a good. These would be sticky goods.
Income elasticity of demand can be used as an indicator of
industry health, future consumption patterns and as a guide to
firms investment decisions. For example, the "selected income
elasticity" below suggest that an increasing portion of
consumer's budgets will be devoted to purchasing automobiles
and restaurant meals and a smaller share to tobacco and
margarine.

Income elasticity of demand

In Andhra Pradesh

In a state like Andhra Pradesh the change in quantity

demanded is quite high in relation to a change in income,
because the people over there have low per capita income.
Thus, whenever if there is any rise in price of rice in the state
the demand for it change to a certain extent, although it is
almost negligible but still much to be considered .

In West Bengal

West Bengal is a much developed state in comparison to

Andhra Pradesh and also the income of the people over there is
much high as compared to Andhra Pradesh. There is hardly any
change in the quantity demanded for rice ii the prices go up
because people have more purchasing power and also rice is
one of the main food over there, so people prefer to eat rice
frequently.

What is cross price elasticity???

The demand of a commodity is affected by a change in the

prices of related commodities also. Cross elasticity of demand
measures a change in the quantity demanded of a particular
commodity in response to change in the price of some related
commodities. It can be defined as proportionate change in the
demand of commodity X in response of a proportionate change
in the price of a related commodity Y.

Types of cross price elasticity

1) Positive cross elasticity

Positive cross elasticity implies that between two goods

X and Y, quantity demanded of X moves in the same direction
as the price of Y. Such goods are known as substitute goods.

2) Negative cross elasticity

Negative cross elasticity implies that between any two

commodities X and Y, the quantity demanded of one would
move in the opposite direction as the price of the other. Such
goods are known as complementary goods.

Although rice do not have any close substitutes, its cross price
elasticity can be measured on the basis of its different
varieties.

Quantity demanded of rice (Sela)- 70%

New quantity demanded (Sela)- 78%

Price of basmati-Rs 50/kg

New price of basmati- Rs 48/kg

Ec=change in quantity demanded of sela/change in price of
basmati

Putting the values in the formula, cross price elasticity comes

2.

CONCLUSION
At last it can be concluded that rice is a major food
grain for India, for domestic consumption as well as for
exports. India is one of the leading rice producer as well
as consumer in the world.
After calculating the demand elasticity, cross elasticity
and income elasticity of the rice it can further be
concluded that their is hardly any change in the
demand of rice in respect of the change in the price,
although the consumers may shift over to other
varieties of rice, but the overall demand for rice is
never decreased.

METHODOLOGY
I have used secondary data to prepare the term paper
from the various sources such as reports, articles and
news.
BIBLOGRAPHY
• www.wikipedia.org

• www.wbgov.in

• www.apgov.in

• Text book