Estimating An Export Function For Principal Agricultural Exports Of India

Abstract

The Prebisch-Singer hypothesis (1950) argues that there was and would continue to be a secular decline in the terms of trade of primary commodity exporters due a combination of low income and price elasticities of demand. This raises the question how India is faring in respect of agricultural exports. Using a double log simultaneous equation model, we estimate an export function for principal agricultural exports from India. A simultaneous equation model works well. The supply side factors like output and rainfall dominate. They have the largest coefficients. This is a good sign for two reasons. One, it takes us away from an over-emphasis on export demand functions. Two, it points to the ‘vent for surplus theory’. It would not be an exaggeration to say that India’s agricultural exports are supply driven.

There are three probable reasons Prebisch-Singer hypothesis may still hold true- low price elasticity, high standard error implying volatility in agricultural export prices and secular decline in export competitiveness. It is, however, heartening to note that export competitiveness of non-traditional agricultural exports does not appear to have declined. A corollary of the aforementioned is a concerted effort towards promotion of exports of non-traditional commodities. However, SPS (Sanitary and Phytosanitary Measures) imposed by the North act as formidable non-tariff barriers.