Investigating Commodity Price Relations across Wholesale Markets: The Case of Paddy in Chhattisgarh, India

Integration among domestic markets is a necessary condition for economic efficiency and it ensures maximum gains for all agents in the marketing chain (producers, consumers, and intermediaries). This paper uses an Autoregressive Distributed Lag (ARDL) model to test for market integration across wholesale markets of paddy in Chhattisgarh - a state in eastern India where a large share of the population is engaged in paddy cultivation. Using monthly data from 2004 to 2016, the study does find evidence of significant horizontal price transmissions among markets both within and across different districts of the state. However, the speed of price adjustments to long-run equilibrium is found to be slow. This indicates that market integration within the state is, at most, weak and, therefore, it is not advisable to excessively rely on price-support policies without initiating market reforms for improved integration. Interestingly, the findings about price transmission (and market integration) are found to be sensitive to the choice of paddy variety: different varieties sold in the same mandi show no evidence of interdependence. Finally, the study identifies lead, lag and isolated markets within the state. Given the imperfections and inequities that exist in the implementation of agricultural price policies (especially in terms of access to support prices) across India, these findings can act as crucial inputs for reassessing policy interventions.