Volatility in agriculture commodity prices in India: impact and macroeconomic and sector-specific policy responses

Globalisation and trade liberalisation have exposed agricultural sector of many developing countries to sudden disturbances, particularly due to volatility in global commodity prices and surge in imports. This paper evaluates the sensitivity of Indian wheat production to these factors, and explores policy options that may neutralise their adverse effects, and maintain price stability.

Findings reveal the following:

• Indian wheat is to be increasingly driven by an incentive structure based on its linkages with world price, exchange rate and other factors
• indeed, shocks arising due to various policy variables tend to bring down wheat price but may not lead to much change in its area
• however, wheat domestic price is not much vulnerable to shocks as it shows a moderate response to price movements in the international market
• actually, wheat crop is backed by administered price and procurement, which provide cushion against shocks caused by an unexpected plunge in its global market price
• still, a hike in support price may increase domestic price and acreage but may discourage higher exports

Correspondingly, the author concludes the following:

• overall, Indian wheat could be sensitive to exogenous impulses caused by external conditions
• nonetheless, due to macroeconomic, trade and price policy measures, its price and output tend to be much more resilient to various shocks compared to its exports and imports
• appropriate and timely adjustments in tariffs together with changes in support price and operation of open-market sales of public stocks may help to counter the adverse effects of likely divergences