CoPS/IMPACT Working Paper Number G-265

Title: A CGE model for India with an application on the effects of eliminating agricultural subsidies

Authors: Peter B. Dixon, Maureen T. Rimmer, Rajesh Chadha, Devender Pratap and Anjali Tandon


Because of its flexibility 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.

This paper describes the construction and initial application of the first version of the NCAER-VU CGE model of India. We describe in detail our process of transforming input-output data published by India Statistics into a form suitable for CGE modelling. We have also expended considerable effort in processing data on agricultural land use with the aim of facilitating applications concerned with agricultural policy.

As an illustrative simulation, we investigate the effects of removing or modifying agricultural subsidies (which account for about 2.5 per cent of Indian GDP). We find that these subsidies inflict a GDP dead-weight loss of about 0.20%, but do not contribute to the objective of supporting farm income. However, if subsidies to Fertilizer and Electricity used by agriculture were phased out and replaced with additional production and sales subsidies, then real farm income would be increased 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.

JEL classification: C68, Q18, H25

Keywords: fertilizer subsidies, electricity subsidies, India, CGE model

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