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The Equilibrium Impact of Agricultural Support Prices and Input Subsidies

Author

Listed:
  • Pubali Chakraborty

    (Bates College)

  • Anand Chopra

    (University of Liverpool)

  • Lalit Contractor

    (Ashoka University)

Abstract

We study the implications of agricultural price support programs, which offer a minimum price predominantly to farmers of staple crops, and farm input price subsidies for consumer welfare and misallocation, measured as the productivity gap between agriculture and non-agriculture. We develop a dynamic general equilibrium model with heterogeneous agents, financial frictions and endogenous occupational sorting between two sectors: agriculture and non-agriculture, and two crops: staples and cash crops. The government procures staple crops at predetermined prices and distributes them as free rations while also subsidising farm inputs. The model is calibrated to match a mix of moments and quasi-experimental evidence pertaining to the Indian economy. Our results suggest that in the absence of the minimum support price policy, labour reallocates from the agriculture to the non-agriculture sector, slightly raising aggregate output and reducing misallocation. A reduction of the input price subsidy lowers agricultural and non-agricultural output and exacerbates misallocation. Policies that replace the support price or input subsidy programs with budget-equivalent income transfers improve welfare.

Suggested Citation

  • Pubali Chakraborty & Anand Chopra & Lalit Contractor, 2024. "The Equilibrium Impact of Agricultural Support Prices and Input Subsidies," Working Papers 123, Ashoka University, Department of Economics.
    • Handle: RePEc:ash:wpaper:123
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    File URL: https://dp.ashoka.edu.in/ash/wpaper/paper123_0.pdf
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    Keywords

    agriculture;

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