Wednesday, 1 January 2014


Journal of Quantitative Economics, Vol. 1 1 Nos.1&2 (Combined), January-July 2013
Academic Foundation, New Delhi, 2011
Review by
SEBASTIAN MORRIS Professor, lndian lnstitute of Managemenl, Vastrapur, Ahmedabad 380015, Email:
This slim volume as the name suggests raises at a most opportune moment the
important issue of the role of prices in coaxing up aggregate output in agriculture' The general
consensus has been that while prices (variously considered as gross agricultural prices, WPI of
food items, terms of trade of agricultural sector with the rest of the economy, ratio of output to
purchased input prices, etc) have and do influence the output of specific crops and subsectors
within the economy, they do not determine the overall output. Conceptually at least if even a
significant part of the agriculture sector is carried out by profit maximizing entities, and if land
can be left uncultivated or partially cultivated in relation to its potential, there is no a priori reason
for such a position. However the consideration that agriculture houses vast disguised
unemployment being the "residual non capitalist sector' in the sense of Arthur Lewis ( "Economic
Development with Unlimited Supplies of Labor,". Manchester School of Economic and Social
Studies, yol. 22, pp. 139-91 , 1954), and is therefore dominated by peasant farms who maximize
value added minus purchased inputs, and the profit maximizing farms entities have very small
shares, then the absence of overall price responsiveness can be a priori expected. Yet if in
particular areas the there is no little or no disguised unemployment and the market wages are too
nign to support agriculture at the national level prices then lands can be left uncultivated,
especially if very fragmented holdings, and or local chauvinism, prevent the use of cheaper
migrant tabour. Not all scholars who have dwelt on the issue of price responsiveness have been
clear. Alagh makes the argument clear, and in an open economy whence imports through the
demand side can affect output , and with the increasing role of capitalist farms should at this
juncture reopen the question. lt now becomes an empirical issue. Already the observation that in
Goa and Kerala significant amounts of land (earlier cultivated) are allowed to go fallow due to
high cost of cultivation (largely due to relatively "high" market wages), means that the assumption
oiuniversal disguised unemployment would no longer be valid. Thus the book picks up a very
significant issue for lndian agriculture. The hallowed ground of a near universal consensus that it
is public investments, seeds and fertilisers, and irrigation, and not prices that affect aggregate
output can be questioned only cautiously, and the book takes the first significant steps. lt is
notable not only because of the empirical analysis but also because of the discussion and the
arguments that the author puts forth for a reconsideration of the problem. The latter could have
been clearer if the author had not been overly reverent to the past consensus.

To show price responsiveness through multivariate models would result in collinearity
with the associated input use such as fert'iiisers and private irrigation; i.e. even if there is
responsiveness it would be through input use. Hence as a first cut analysis Alagh has studied the
area response to relative prices. He shows that during the period 1981-82 to 2C01-03/03-04' the
area response of the non-food grain sector has been significant to the terms of trade (ToT) of
agriculture as a whole. ln doing so he goes through a number of specifications - linear' log-linear
and log-log models. This is the principal conclus]on of the book. He estimates the same model
but now over a restricted set of data to make forecasts over the last six years or so for which the
TOT information ls available, in the chapter on policy analysis' These forecasts are then
compared to the actual realized area use in non{ood grains, to show that there is agreement in
terms of the upswings and downswings being able to match the data'
prior to these analyses, the carries out a series of Chow-tests to establish that there has
been change in growth raies and in the level of agricultural output from period to period' This
justifies the periodization, so that that the period from 1975-80 onwards up to 2003-04 stands out
as significantly different for a number of crops. while the chow tests are meaningful on levels on other determinant variable to establish structural shifts in causation (i'e' in the
parameters), the Chow tests when used to elicit significant changes in growth rates (the
dependence being on time) would have to be necessarily cast on a log(of output)-linea(on time)
model specification, because the a priori is no shift in the slope (= the growth rate)' With
specification as above and with adjacent periods, the test while conceptually is jointly for change
in the constant(log value) and the slope (growth rate), would in effect be for the latter, given the
adjacent aspect of the period. lt is better to have carried out a dummy variables
specification where significant t-values  in the model would reveal level
shifts and growth rate changes respectively (Gujarathi, Damodar (1998) Basic Econometrics'
McGraw Hill).

Thus the chow tests for the exponential trend coefficient for production are enough with
regard to production or output. For area since there is no a priori expectation of continuously
increasing area the linear model is appropriate. For yield it is debatable what needs to be used'
These are rather marginal considerations that should not take away the value of the analysis
which clearly shows stiuctural change in the growth rates for a number of crops some declining
(eg. coarse cereals), and many others increaiing levels (area) and yields and production' That
growth rates during the latter period have differeJ significantly for a large number of crops and for
food grains as well is firmly established. Chapter 3 as mentioned before shows that the supply
response of non-foodgrains (as measured) by the acreage has been sensitive to prices during the
last period. This ls through a single factor model and justification for the same is in terms of prices
determining other associated variables and area itself. Nevertheless use of an additional factor in
the form of rainfall suggests itself, though it is an empirical issue if the small number of data
points would not limit degrees of freedom. That could possibly give robustness to the impact
of the TOT.
The critique of the literature provides a gentle but nevertheless pointed exposure to the
price responsiveness debate. The study should open the door to further inquiry on this important

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