The effects of WTO on agriculture in India: the possible effects of further liberalisation on price volatility

Abstract

Agriculture is till now, the most important sector of the economy of many developing countries, including India, from the point of view of employment. The livelihood of more than half of India s population depends on this sector. This is a sector which has to cope with a high degree of uncertainty. The level of production, to a large extent depends on unpredictable physical conditions. The supply side is extremely important in determining prices as the demand side is relatively stable. Violent price fluctuations, causing immense hardship to the financially vulnerable peasant community, have often been experienced. The international market for agricultural commodities is quite volatile. Studies have shown, that for many important crops, the global markets experience greater inter-year variability than the Indian markets. The World Trade Organisation has ushered in an era of low trade barriers, even in the agricultural sector. India, a member of WTO, has had to liberalise her farm trade regime by removing quantitative restrictions and other policy measures. The opening up of the farm sector to international market forces has serious implications for India. Five important agricultural crops have been selected for the present study. This dissertation paper examines the possibility of increase in volatility in prices of the agricultural commodities if there is further liberalization in international trade in these crops. For shedding light on this broad question it has been studied whether there is any relation between openness of trade of a commodity and the fluctuations in its prices (It was examined first whether, since 1995, degree of openness of trade for the selected commodities have increased or not) and whether there is a significant correlation between movement of domestic and global prices of the selected commodities. It was found that when the openness becomes significant enough to matter in the mechanism of price determination, it has a positive impact on both volatility and correlation between domestic and international prices. It was also found that for all the five commodities, there was a long-term equilibrium relationship between global and domestic prices.