“Some Policy
Options for Indian Agriculture: Analysis Using a Regional Computable General
Equilibrium Model”
Citation: Ganesh-Kumar, A. and M. Panda. 2014.
“Some Policy Options for Indian Agriculture: Analysis Using a Regional
Computable General Equilibrium Model”. Report submitted to the World Bank, New
Delhi.
Abstract: In this study, we analyse the impact
of several agriculture related policies in India using a spatially
disaggregated general equilibrium model for India. Specifically, we examine
questions related to improvement in agricultural productivity across states as
well as specific states in Eastern India and other policies such as fertilizer
subsidy reduction, irrigation expansion, market integration and removal of
exports barriers. We also study impact of productivity rise in industry and
services sectors. Some major results of the study are the following:
·
When
agricultural total factor productivity rises in various states, product-mix of
the agricultural activity in the states is expected to change considerably,
though it may not result in national level growth in the agricultural output
basket.
·
The
results indicate that productivity rise per say in the states does not lead to
major income gain by farmers since the increase in output gets virtually
neutralized by decline in prices. An exogenous productivity increase by itself
without policies on demand expansion is likely to be ineffective in practice.
·
The
results also show the importance of ensuring that the production structure in
agriculture is flexible to respond to price changes. If on the other hand the
production structure is riddled with rigidities, then a productivity
improvement could have a positive impact on the quantity output of some
agricultural commodities, but it would come with a heavy price in terms of loss
in real income for households. Thus, there could be a trade-off between
physical output quantities and real income of households, especially rural
households.
·
Fertilizer
subsidy withdrawal raises agricultural activity level in several states but
reduces it in others. Growth in agricultural activity level is negative in states
such as Maharashtra, Assam and Punjab while Bihar, West Bengal, and Uttarakhand
record positive output growth. It also leads to considerable changes in the
composition of all-India commodity output basket from foodgrains, sugarcane and
oilseeds to vegetables, livestock, fishery and fibres.
·
When
all the states raise their irrigation capacity simultaneously, agricultural
activity in every region may not benefit due to changes in comparative cost
advantage.
·
Market
integration across states in India benefits several states leading to an
increase in output of several agricultural commodities such as milk, oilseeds,
fibre, sugarcane, though output of rice and wheat drops. Market integration has
substantial positive income effect on the various income groups in both rural
and urban areas across states.
·
Removal
of barriers to agricultural exports helps in inducing a positive supply
response in several states. Exports and imports rise with a positive effect on
net exports resulting in appreciation of the Indian rupee. This policy,
however, has an adverse effect on welfare of domestic consumers.
·
A
combined policy package of the above policy instruments – productivity rise,
subsidy reduction, irrigation expansion, market integration, and exports
barriers removal – helps in raising agricultural activities in 20 of the 23
states/regions. The package has positive growth impact on fruits, sugarcane,
oilseeds, rice and wheat. Price rise of total agricultural activity is moderate
in all the states. It has favourable effects on agricultural output growth,
total private consumption and investment. All consumer classes across states
(except urban top in one state) benefit positively in this run indicating that
it is a near Pareto optimal situation.
·
Productivity
rise in non-agriculture does impact pattern of regional agricultural growth and
commodity composition of agricultural output basket. Agricultural activity
prices fall possibly reflecting demand constraints. On the whole, however,
productivity rise in the non-agricultural sectors does not help to increase
agricultural income, consumption demand or exports demand.
·
With
regard to commodity options for the states of Eastern India, the results show
that in terms of agricultural output, agricultural value added and per capita real
income of households also, West Bengal and Odisha are better off pursuing a
commodity neutral strategy instead of focusing on any particular commodity,
while Jharkhand is better off focusing on Fruits and Vegetables.
·
In
contrast, for Bihar, Assam and Chhattisgarh the results show that there is a
trade-off between agricultural output and value added on one side and real
incomes on the other. In Bihar the commodity neutral approach seems best for
improving agricultural output and value added but real income of the poorest
classes improve most when the state focuses on Animal products. Focusing on
specific commodities (Rice, Fruits & Vegetables and Animal products in the
case of Assam, and Animal products in the case of Chhattisgarh) turn out best
for improving agricultural output and value added, but under such an approach
real income of the poorest classes in these states do not improve as much as
they would if these states were to follow a commodity neutral approach.