National spreadsheet for agricultural distortions in India

This chapter analyzes the impact on incentives for India's agriculture resulting of price, trade and exchange rate policies, focusing on incentives for agriculture relative to incentives for manufacturing and the rest of the economy. This study updates the earlier estimates to 2005 and incorporates estimates for agriculture going back to 1965. In addition it extends the previous work by taking account of policies affecting incentives for the production of fresh fruit and vegetables and dairying, which between them account for large shares of the rural economy as measured by their contributions to gross domestic product (GDP). In addition, policies affecting food processing are discussed briefly. The chapter is organized as follows. It begins with brief overviews of Indian economic growth and structural changes in the economy and the evolution of India's trade policies since independence, including comments on the effects of India's present agricultural trade policies on agricultural trade with its neighbors in South Asia. This is followed by a discussion of the exchange rate and how exchange rate changes have interacted with trade policies, especially during the massive Rupee devaluation which started in 1985 and ended in 1993. Quantitative evidence on nominal rates of assistance to various agricultural sub-sectors, including via electricity and fertilizer input subsidies, are then provided, followed by estimates of distortions to incentives for farmers relative to producers of non-agricultural tradable. The latter shows that the marked anti-agricultural bias of policies of earlier years gradually disappeared, and in the current decade has been replaced by a slight bias in favor of agriculture. Finally, the authors discuss the political economy forces that are likely to influence the direction of future Indian policies, including the possibility that a strong pro-agricultural bias may emerge along the lines followed by more-advanced densely populated economies in East Asia and elsewhere.