Estimation of Agricultural Supply Response by Cointegration Approach

Abstract

The issue of agricultural supply response is a very important one as it has an impact on growth, poverty and environment. The size of agricultural supply response is expected to improve after removing some of the constraints that farmers were facing before. Though many constraints have been removed from the agrarian system and many incentives have been provided to farmers, still the supply response for Indian agriculture is price inelastic. Hence, the question is supply response price inelastic becomes relevant. The present study is an attempt to find supply response through cointegration approach and to see if the response has been better at the all India level in comparison to previous studies. Further, it also focuses on the question whether there is difference in the supply response among highly agricultural based, medium agricultural based, and low agricultural based states. The study indicates that aggregate agricultural output elasticity with respect to agricultural TOT is very low and not statistically different from zero. I. Introduction One of the most important issues in agricultural development economics is supply response since the responsiveness of farmers to economic incentives 1 largely determines agriculture's contribution to the economy. Further, the response elasticities are also important for policy decision regarding agricultural growth. That is why it has been a debatable issue among economist and policy makers in both India and abroad for the last five decades. Agricultural supply response represents change in agricultural output due to a change in agricultural output price. The concept of supply response is dynamic and different from supply function which is the static concept. The supply function describes a price quantity relation, where all other factors are held constant. The response relation is a more general concept; it shows the change in quantity with