Inter-sectoral terms of trade and aggregate supply response in Gujarat and Indian agriculture

Abstract

In this paper we empirically investigate the role of inter-sectoral terms of trade in determining the growth performance of agriculture in Gujarat and All India during the period 1960-2011. Terms of trade reflects price signals and economic incentives for producers and hence could be a determinant of supply response and growth performance of agriculture and the whole economy. We identify structural breaks endogenously in inter-sectoral terms of trade and analyse phase wise growth performance in distinct periods in both Gujarat and all India. Empirical analysis supports the hypothesis that favourable terms of trade for agriculture lead to a higher growth in agriculture and the whole economy. The results show a strong evidence for positive price elasticities of supply in agriculture and almost rules out the possibility of backward bending supply curve. Favourable terms of trade for agriculture are an additional factor for the high growth trajectory of Gujarat agriculture not emphasized in the literature.