Relative Profitability, Supply Shifters and Dynamic Output Response:The Indian Foodgrains
The realisation that the wage-goods constraint, if binding, could stall the growth process of a developing country, prompted policy makers to encourage agriculture by various means. The success of public policy depends, however, on how strongly farmers respond to the incentives provided. Using a large panel dataset pertaining to Indian agriculture - spanning the period 1967-68/1999-00, and covering the 6 important food crops cultivated across 16 major states - we provide estimates of area, yield and output elasticities w.r.t price and nonprice factors. We find consistent evidence, that the supply response of food crops is influenced by rainfall, input availability (specifically irrigation, fertilizer and improved seeds), and relative profits, in that order of importance. Our results prompt us to conclude, that all things considered, the preferred policy should be to encourage irrigation, fertilizer use and the use of modern seeds, rather than raise output support/procurement prices period after period.
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