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Agricultural Economy of India and Macro-Economic Effects: Some Empirical Results and a Research Agenda based on the Literature

Munish Alagh

No WP2011-09-01, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: This paper focuses on macroeconomic linkages with agriculture. From an extensive literature review the question that emerges is: is there a structural constraint in Indian agriculture or does Indian agriculture work in a system in which as demand rises and prices rise, supply responds. The constraints maybe institutional or policy determined in the foodgrains part of the economy, with the non foodgrain economy being responsive to market forces. These kind of general hypotheses lead to analysis of macroeconomic policy variables particularly of impacts of government expenditure and money supply. What are the impacts of such policies on agricultural prices and interest rates for agriculture? How do they impact on agricultural demand, supplies and investment? If expansionary/ contractionary macro policy (Monetary-Fiscal policy mix) leads to rise/fall in money income, it will impact significantly on agricultural demand. Does this then lead to fluctuations in agricultural supply? There are many ways to analyze this kind of question. We use a partial economy framework using lags to help the specifications of our model. A Causal Chain model demonstrates econometrically that macro policies impact agriculture in a significant manner. The farm-nonfarm ratio determines supply with a Nerlovian lag and the model predicts supply oscillations in the non foodgrain agricultural economy. The work has possibilities of more complicated policy simulations of macro policy impacts on agriculture.

Date: 2011-09-01
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