The effects of price deregulation on market outcomes, competition and the environment: The case of Indian agri-inputs

In 2010, the Indian government initiated the “Nutrient-Based Subsidy (NBS)” policy effectively deregulating Phosphate and Potassium fertilizer prices, from low levels set far below the global price, to market prices set by the distributing firms. Subsidies dropped from covering the full gap between the regulated maximum retail price and import costs, to a lower level announced to the distributers prior to them setting their price. Nitrogen fertilizer remained under complete government regulation. Although the nutrients are technically complementary in the plant growth process, we show patterns of substitution in the demand for different products following the sharp change in price ratios. Quantities of PK fertilizers drop creating more unbalanced and polluting fertilization practices. On the other hand, the increased profit margins in PK fertilizers encourage new firm entry into new geographical markets, which in turn reduces prices and increases demand. In this (early stage, but building on previous work) project I use various micro-level data to construct a full picture of the industry dynamics around the policy change. The results will provide evidence on the substitutability between price control measures and competition promoting policies in improving market outcomes for farmers, productivity and environmental consequences, and a counterfactual analysis of deregulating Nitrogen fertilizers as well.