Resilience of Indian Agriculture to External Shocks: Analyzing through a Structural Econometric Model

Is Indian agriculture resilient to external shocks? This question has assumed considerable importance ever since macroeconomic reforms were implemented from the early nineties. As a result, the agricultural sector was exposed to sudden disturbances caused not just by the demand and supply conditions within the country, but also by volatility in world market price, exchange rate and surge in imports. This paper aims to evaluate the magnitude of sensitivity of agriculture to these factors and other changes, and explores policy options that may neutralize their adverse effects, maintain price incentives and stability. The analysis is based on three important tradable commodities. A structural econometric model is applied to each, separately under the exportable and importable scenarios from 1980-81 to 2002-03. Broad findings reveal agriculture to be increasingly driven by an incentive structure based on its linkages with world market price, exchange rate and other factors. Counterfactual simulation experiments indicate that due to trade and price policies, commodity prices and output tend to be much more resilient to various shocks compared to the exports and imports.