Terms of Trade and Supply Response of Indian Agriculture: Analysis in Cointegration Framework.

Abstract

In this paper, we examine the presence of stochastic trend (unit root) and structural break in various agriculture-industry terms of trade series in India. The results suggest that underlying data generating process of terms of trade are most likely non-stationary. We subsequently re-examine the aggregate supply response of Indian agriculture in this light. We investigate the presence of long-run functional relationship(s) underlying the supply response model through cointegration analysis and error correction framework. The multivariate results indicate presence of a cointegrating relationship in the supply response model. The vector error correction estimates suggest that short-run output adjustments are not related to changes in agricultural terms of trade in a temporal causal relationship. However, the short-run deviations in terms of trade from its long-term level create error-correction in the long-term output adjustments through changes in technology (irrigation). This may imply that agricultural growth can respond better if price incentives are combined with investments in irrigation.domestic terms of trade, agricultural supply response, unit root, cointegration