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Supply response of Indian farmers: Pre and post reforms

Listed author(s):
  • G. Mythili


    (Indira Gandhi Institute of Development Research)

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    Supply response to price changes is likely to increase with the increasing liberalization of the agricultural sector. Past studies revealed weak supply response for Indian agriculture. There are no recent reliable estimates to see if the response has improved after the economic reforms introduced in early 90s in India. This study estimates supply response for major crops during pre and post reform periods using Nerlovian adjustment cum adaptive expectation model. Estimation is based on dynamic panel data approach with pooled cross section - time series data across states for India. The standard procedure is to use area as an indicator of supply due to the reason that area decision is totally under the control of farmers. Moreover using supply conceals some variations in area and yield if they move in the opposite directions. In this paper, it is hypothesized that acreage response underestimates supply response and farmers respond to price incentives partly through intensive application of other inputs given the same area, which is reflected in yield. Acreage and yield response functions were estimated and the supply response estimates were derived from these two responses. The significant feature of the specification used in the study is both main and substitutable crops are jointly estimated by a single equation by introducing varying slope coefficients to capture different responses. As expected, foodgrains reveal less response than non-foodgrains. The study found no significant difference in supply elasticities between pre and post reform periods for majority of crops. It raises questions such as whether the constraints are properly identified by the policies or if the impact of reform is yet to be felt in order to make a prominent impact on response parameters. In this study, infrastructural variables other than irrigation could not be introduced due to lack of information for a long time series. Results confirmed that farmers respond to price incentives equally by more intensive application of non-land inputs. Further analysis of the reasons for little impact of reforms on the responses is awaited.

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    Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2006-009.

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    Length: 36 pages
    Date of creation: Nov 2006
    Handle: RePEc:ind:igiwpp:2006-009
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    1. Marc Nerlove, 1979. "The Dynamics of Supply: Retrospect and Prospect," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 61(5), pages 874-888.
    2. Pandey, L.M. & Kumar, Sant & Mruthyunjaya, 2005. "Instability, Supply Response and Insurance in Oilseeds Production in India," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 18(2005).
    3. Nowshirvani, V F, 1971. "Land Allocation under Uncertainty in Subsistence Agriculture," Oxford Economic Papers, Oxford University Press, vol. 23(3), pages 445-455, November.
    4. Eckstein, Zvi, 1984. "A Rational Expectations Model of Agricultural Supply," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 1-19, February.
    5. Nerlove, Marc, 1971. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross Sections," Econometrica, Econometric Society, vol. 39(2), pages 359-382, March.
    6. Larry G. Epstein, 1981. "Duality Theory and Functional Forms for Dynamic Factor Demands," Review of Economic Studies, Oxford University Press, vol. 48(1), pages 81-95.
    7. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    8. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
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