By Peter B. Dixon and Maureen T. Rimmer and Rajesh Chadha, Devender Pratap and Anjali Tandon
- (1)In 2015 the National Council for Applied Economic Research(NCAER)in New Delhi and Victoria University in Melbourne signed memorandum of understanding (MOU) to promote co-operation in applied research on the Indian economy focused around computable general equilibrium (CGE) modelling. This paper is the first product of co-operation under the MOU.
- (2)Because of itsflexibility and realism, CGE has gradually become the dominant form of economy-wide modelling (modelling that provides industry disaggregation in a quantitative description of the whole economy). Over the last 50 years, CGE models have been used in the analysis of an enormous variety of policy-relevant questions.
- (3)This paper describes the construction and initial application of the first version of the NCAER-VU CGE model.
- (4)In building the model, we have transformed input-output data published by India Statistics into a form suitable for CGE modelling. We have alsoexpended considerable effort in processing data on agricultural land use with the aim of facilitatingapplications concerned with agricultural policy.
- (5)In developing NCAER-VU we are emphasizing applications and back-of-the-envelope (BOTE) explanations and justifications of results.
- (6)Although NCAER-VU is at an early stage of development, it has already generated potentially important insights on the effects of agricultural subsidies. We find that:
- agricultural subsidies are worth about 2.5 per cent of GDP with about 1/3rdbeing subsidies on inputs of Fertilizer and Electricity to agricultural industries and about 2/3rds being subsidies on production and sales of agricultural products.
- agricultural subsidies inflict a GDP dead-weight loss of about 0.20%, most of which is associated with the subsidies on Fertilizer and Electricity. The percentage loss in economic welfare measured by foregone consumption is about 0.24%.
- agricultural output is about 2.3%greater with subsidies than without.
- agricultural subsidies increase output and exports of Cotton textiles, Edible oil, Woollen textiles, Khadi and Apparel, but reduce output and exports ofCommunication equipment, Non-ferrous metals and Computer services.
- about 20%of Fertilizeroutput and 7%of Electricity output depend on agricultural subsidies.
- Fertilizer and Electricity subsidies do not contribute to the objective of supporting farm income. By inducing substitution against factors that contribute to farm income (agricultural land, and labour & capital used on farms), Fertilizer and Electricity subsidies reduce real farm income by about 2%. By contrast, production and sales subsidies on agricultural products boost real farm income by about 5%.
- all of the current agricultural subsidies contribute positively to food security. The subsidies reduce food prices relative to the CPI by about 7%and increase food consumption by about 0.7%.
- If government provision of Fertilizer and Electricity subsidies to the agricultural sector were phased out and replaced with additional provision of agricultural production and sales subsidies, then real farm income would beincreased by about 4%with no deterioration in the public sector budget, almost no effect on food security, and small increases in GDP and overall welfare