Supply response of Indian farmers: Pre and post reforms

Abstract

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.