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Foodgrain Price Policies in India: The Effects on Foodgrain Production and Rural Poverty 1951-2001

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  • Wilson, E.J
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    Abstract

    There is a large research literature which quantifies the important contributions of public, private and human capital to economic growth and poverty reduction. However, studies based on the endogenous growth model tend to exclude the effects of relative prices on economic growth. This paper develops a simple growth model which details the effects of minimum producer support prices and maximum consumer issue prices on Indian foodgrain production and rural poverty, subject to a long run government budget constraint. The major structural changes in the non-stationary variables are endogenously identified over the period 1951 to 2001 and the Johansen FIML procedure is used to derive efficient estimates of important long run elasticities. It is found that a one per cent increase in the real minimum producer support price for wheat will increase real foodgrain production per rural worker by 1.3 per cent in the long run. Similarly, a one per cent reduction in the real consumer maximum issue price for wheat (via the public distribution system) will reduce the rural head count poverty ratio by 1.3 per cent in the long run. The government budget constraint applies in the long run whereby a one per cent increase in the minimum producer support price requires the consumer maximum issue price to increase by 1.5 per cent. However, these prices can be moved in opposite directions to reduce poverty in the short run. A one per cent increase in the minimum producer support price is found to Granger cause the maximum issue price to fall by 1.1 per cent in the next year. This dynamic growth analysis confirms that price policy in India since independence has importantly promoted the production of foodgrain and contributed to the reduction in rural poverty. Prices can be powerful policy instruments and the elasticity estimates contained here certainly support this view.

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    Bibliographic Info

    Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

    Volume (Year): 5 (2005)
    Issue (Month): 3 ()
    Pages:

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    Handle: RePEc:eaa:aeinde:v:5:y:2005:i:3_2

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    Related research

    Keywords: foodgrain production; price policies; economic growth; rural poverty;

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    References

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    1. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
    2. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
    3. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
    4. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    5. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-20, July.
    6. World Bank, 2000. "India : Policies to Reduce Poverty and Accelerate Sustainable Development," World Bank Other Operational Studies 15106, The World Bank.
    7. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
    8. Howard Pack, 1994. "Endogenous Growth Theory: Intellectual Appeal and Empirical Shortcomings," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 55-72, Winter.
    9. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    11. Lau, Lawrence J. & Yotopoulos, Pan A., 1989. "The meta-production function approach to technological change in world agriculture," Journal of Development Economics, Elsevier, vol. 31(2), pages 241-269, October.
    12. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
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