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Higher agri price influenced Gujarat agriculture to grow by 10 plus per cent in 2001-2011: Senior economist

Prof Dholakia
By Rajiv Shah
Amidst sharp controversy raging among top scholars on whether high agricultural growth rate of Gujarat agriculture is being cited by a section of economists by choosing one of the worst drought years as the base year (2000-01) (click HERE to read), a senior economist of the Indian Institute of Management-Ahmedabad, has said come up with a new explanation of the allegedly high growth rate. He has said that a higher price for agricultural product has been the main reason why Gujarat’s agriculture grew at a higher than 10 per cent per annum between 2001 and 2011. IIM-A’s Prof Ravindra Dholakia, who is one of those who has been criticized for choosing a bad drought year as the base, has in a recent paper, “Inter-sectoral Terms of Trade and Aggregate Supply Response in Gujarat and Indian Agriculture”, has said, “Inter-sectoral terms of trade” played a major factor ”in determining the growth performance of agriculture in Gujarat and all India”, whether it was the last decade or earlier.
Prof Dholakia’s view that a high agricultural growth rate is more the result of better terms of trade than anything else comes amidst fresh data, made available by the Government of Gujarat’s agricultural department, which show that the state’s agricultural production fell sharply in 2012-13, a semi-drought year, anywhere between 16 per cent (cotton) and 72 per cent (groundnut) (click HERE to read more). Overall, the state agricultural production fell by about 20-30 per cent, these estimates go to suggest. Already, state officials are trying to suggest that in 2013-14 the state agriculture will rise by 20 per cent, which suggests it will be back to where it was in 2011-12, when, again, it grew very little.
Prof Dholakia says, “Terms of trade (ToT) reflects price signals and economic incentives for producers and hence could be a determinant of supply response and growth performance of agriculture and the whole economy. We identify structural breaks endogenously in inter-sectoral terms of trade and analyse phase wise growth performance in distinct periods in both Gujarat and all India. Empirical analysis supports the hypothesis that favourable terms of trade for agriculture lead to a higher growth in agriculture and the whole economy. The terms of trade reflect the price incentives that producers in the respective sectors face determining their investments, savings and competitiveness.”
The senior economist, who has written the paper in association with Amey A Sapre of the Indian Institute of Management, Kanpur, has said that “Gujarat did not experience a statistically significant growth in agriculture except during the last decade. On the other hand, agriculture in the nation grew at a statistically significant rate during all the past decades. Comparison of the performance of agricultural income during the last decade between Gujarat and all India, however, almost reverses the story of the earlier decades. The decade of 2001-11 shows the first statistically significant growth performance of agriculture in the state. The average growth rate is about 10.6% per annum and a statistically significant trend growth rate of 8% was registered in the state during this period compared to only 3.1% in the nation. This period also shows a considerable decline in growth fluctuations.”
Given this framework, Prof Dholakia says, “When we calculate the compound annual growth rate (CAGR) of Gujarat agriculture and total gross state domestic product (GSDP) for the three phases of ToT, we find that during the first phase of 1960-61 to 1974-75 when ToT was highly fluctuating, the agricultural trend rate was 2.2% (statistically not different from zero) while it was around 3% for total GSDP. During the second phase when ToT was fluctuating but around a falling trend, the agricultural CAGR was 2% (again statistically not significant) and 4.9% for total GSDP. However, during the third phase when the agricultural terms of trade were sharply rising, the agricultural CAGR was statistically significant at 3.8% and GSDP registered a CAGR of 7.60%, which later rose to 8.0% for agriculture and 10.4% for GSDP.”
Prof Dholakia further says, “It is equally evident that prior to 1990-91, the terms of trade were rising for the nonagricultural sector and post 1990-91; the same were declining. Thus, agriculture was relatively losing before 1990-91 and was economically gaining after 1990- 91 in Gujarat. This change of regime seems to have spurred a positive and significant growth of agriculture in the state after 1990-91. Similarly, at the national level we observe four distinct phases of terms of trade regimes, viz. 1950-51 to 1966-67, 1967-68 to 1974-75 and 1975-76 to 1990-91 and the last phase 1991-92 to 2010-11. Direct evidence based on the association of the growth rates of agricultural output and total output during different phases of ToT indicates that agricultural terms of trade have a significant bearing on agricultural growth performance and on the overall economy.”
He underlines, “The evidence is sharper for the state than for the nation. It is possible to argue that a strong favorable upward trend in the terms of trade for agriculture (and hence unfavorable trend for nonagriculture) would lead to agricultural growth, prosperity and subsequently to higher growth trajectory for the state. This happens because, other things remaining the same, when prices of agricultural commodities rise, farmers are encouraged to supply more value by changing cropping pattern in favor of high value crops, bring more area under cultivation, increase cropping intensity, increase investments in modern inputs and machinery, expand irrigation facilities, or take more risks for better technology, marketing, and storage among others.”
He says, “During the period 1974-93, the elasticity in both the cases was negative and not significant, but during the latter period of 1992-2011, the elasticity in both the cases was positive and significant. This indicates a sharp contrast in the two phases such that the overall regressions for the whole 51 year period turned out to be statistically irrelevant. Moreover, the second phase of 1992-2011 has the expected sign of the elasticity estimate as compared to the earlier phase (1974- 93) which has an opposite sign though statistically insignificant. During 1974-93 there were serious restrictions on trade of even non-agricultural products because of quantitative restrictions and high tariff barriers. Moreover, during these years several prices were also administered and controlled. As a result, the underlying economic logic of price incentives to producers in the sector would not fully work during such period and would empirically lead to statistically insignificant results.”
He goes on to say, “However, with economic policy reforms initiated during the early 1990s, several market distortions including the ones in export markets were reasonably corrected and the economic logic of price incentives started operating in a holistic sense. As a result, the hypothesis of favorable terms of trade to agriculture leading to growth of agriculture and hence the total state income appears to hold in Gujarat from the empirical evidence. It also provides us the estimates of aggregate price elasticity of supply for agricultural output to be +1.15 and for overall GSDP to be +2.46. These estimates suggest that the ToT as a policy parameter has a definite role to promote growth of agriculture and total income in the state; and the more favorable it is for agriculture, the more effective it would be.”
Coming to comparison between Gujarat and India, he says, “At the All India level, the corresponding results for the same time period as of Gujarat for agriculture and GDP are as follows. It may be noted that the drought dummy variable was found insignificant in all cases. Significant acceleration in Gujarat agriculture and the overall economy is associated with sharply rising ToT in favour of agriculture – a factor most studies have not considered while explaining the success story of Gujarat agriculture. Prior to 1992-93, the terms of trade were falling for the agricultural sector and post 1992-93, the same were rising. Thus, agriculture was relatively losing before 1992-93 in the state and as ToT changed favorably, they spurred significant growth of agriculture.”

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