Foodgrain price stabilisation in an open economy: A CGE analysis of variable trade levies for India

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Abstract
Within the present multilateral trading system, the developing countries are obliged to gradually open up their agricultural sector to world markets. As a result of this, the effectiveness of conventional instruments of food price stabilisation will be greatly reduced. How then is food price stability to be maintained in a liberalised open economy? This article presents a general‐equilibrium evaluation of using variable trade levies on agricultural trade to stabilise foodgrain prices in response to exogenous shocks. This is done for the Indian economy with the help of a multi‐period computable general equilibrium (CGE) model, focused on agriculture and income distribution. The model is used to analyse the sensitivity of the economy's growth, income distribution and food security to external and internal shocks under varying degrees of trade openness. The results show that both shocks are distributionally regressive and, with external shocks, become more so, the more open the economy is. WTO‐consistent variable levies on agricultural trade are found effective in stabilising prices, checking real wage erosion and containing regressive distributional effects.

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