The Impact of Government Policies and International Trade on Indian Agriculture

The recent rise in suicide rates amongst farmers in India today is the symptom of an underlying crisis in agriculture due to the marginalization of the agrarian economy. It may partially be explained as a result of an increasingly globalized environment and the presence of supranational economic regimes such as the WTO and The World Bank which to a certain extent influences the government policy on agriculture, particularly those regarding subsidies given to farmers, international trade tariffs as well as non-tariff measures. The policies of the Government of India too, are not helpful to the farmer as the twin objectives of the government to keep food prices under control on one hand and to ensure fair prices to the farmer on the other hand are often conflicting and result in unpredictable trade policies. This results in restraining the farmers from selling their produce in the international markets whenever convenient as well as instituting tariff and other barriers for agricultural imports. In this research, we have used the Global Simulation Model (GSIM) for partial equilibrium analysis of two crucial crops produced in India. Further I have also computed the welfare gains for three separate scenarios, namely; (a) an ambitious scenario, (b) a very ambitious scenario, and (c) a limited scenario. The ambitious scenario is a free trade agreement between India and EU where the bilateral tariff is completely abolished. The very ambitious scenario is also a free trade agreement but it is assumed that EU will also abolish its export subsidies to India . The limited scenario is a less ambitious version of the ambitious one in terms of depth of the liberalization. The research finds that free trade in the said commodities does result in positive producer and consumer surplus but also to dropping prices for cotton and wheat produce. The net welfare effects for scenario one, two and three for cotton for India are 130.5, 126.6 and 59.6 million USD respectively. The welfare effects for wheat are 11.1, 15.6 and 7.2 million USD for scenario one, two and three respectively. However, the prices for cotton drop by a maximum of 2.3% only, while wheat prices may decrease by up to 13% - seriously affected incomes of Indian farmers. If these price decreases are not compensated for by increases in production and exports onto the world markets, Indian wheat farmers may lose out, aggravating the worries of the Indian government of further marginalization of certain agricultural sectors An EU-India FTA is not the same as a multilateral free trade approach and the Indian government may want to analyze carefully comparative advantages of trade partners before engaging in bilateral trade talks. Moreover, this research shows clearly that EU CAP reform affects the way the Indian farmers are affected – the less subsidized the EU farmers the lower the cotton and wheat imports from the EU and the less prices for produce drop – leaving Indian farmers with higher world prices for cotton and wheat. The research concludes by recommending fewer restraints for the farmer and promoting a more liberal free trade policy in agricultural products.