An Analysis of Marketed Surplus Response

of Cereals in Haryana State of India

S.K. Goyal
Department of Business Management, CCS Haryana Agricultural University,
Hisar 125 004, India. E-mail: goyalsk@hau.nic.in
Ernst Berg
Department of Farm Management, University of Bonn, Meckenheimer Allee
174, 53115 Bonn, Germany. E-mail: E.Berg@uni-bonn.de

ABSTRACT
This report uses a model that considers the effect of both factor and output prices on marketed
surplus+ To derive input demand and output supply elasticities, the normalized quadratic profit func-
tion and demand equations were estimated jointly with the seemingly unrelated regressions ~SUR!
estimation technique using farm level panel data+ The data confirm the theoretical framework+ The
derived price elasticities of input demand, output supply, and marketed surplus have been simulated
to examine alternative price policies for securing different levels of marketed surplus+ At the observed
price structure, the marketed surplus of wheat will increase almost equal to population growth, but
in case of paddy it will grow at a very low rate+ The study further reveals that besides price adjust-
ment, technological improvement and non-price factors are also of critical importance for increas-
ing output supply and, hence, marketed surplus+ @EconLit citations: Q120, C330+# © 2004 Wiley
Periodicals, Inc+

1. INTRODUCTION
Farm prices coupled with technology play a vital role in the development policy for stim-
ulating agricultural growth+ The main objective is to increase the output supply in order
to match the growing demand that results from the growth of the population and the per
capita net national income+ To increase output supply, it is necessary to have knowledge
about the degree of response of the demand for factors and the supply of products to
relative price and nonprice factor movements+ The behavior of marketed surplus to changes
in prices and nonprice factors is also of critical importance for forecasting the supply of
food grains to the nonfarming population and for formulating the agricultural price pol-
icy+ In case of crops that are wholly or almost wholly marketed, the response of output
and marketed surplus0market supply to price changes will almost be the same+ But in
case of crops such as wheat, rice, bajra, etc+, where the producers, particularly the small
farmers, retain a substantial part of the output for their home consumption, responsive-
ness of marketed surplus to input-output prices needs to be measured+ The Government or
the policy planners face the challenge of formulating suitable agricultural policies by
Agribusiness, Vol. 20 (3) 253–268 (2004) © 2004 Wiley Periodicals, Inc.
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/agr.20014

253
254 GOYAL AND BERG

which the desired growth in agricultural output can be achieved+ The fact that various
instruments of agricultural policies such as input-output prices, procurement, buffer stocks,
public distribution, interstate movements, export-import0international trade, and so on,
provide incentives to the agricultural producers to boost production by providing price
support is one of the most important agricultural policies+ The response of farmers to
price changes can provide the direction for suitable agricultural price policy that, in turn,
may act as stimulant for increasing agricultural production, e+g+, the information gener-
ated by the present study may be useful to find out price changes and productivity growth
required reaching to different production levels+
Rice and wheat are the most important cereal crops in India, constituting about 44 and
35% of the total food grain production and accounting for about 24 and 15% of the total
cropped area, respectively+ In Haryana State of India, rice and wheat cover about 14 and
35% of the total cropped area of the state+ These two crops together account for about
85% of the total food grain production and contribution to the national pool was about 8%
of the total national pool in the case of paddy and 28% in the case of wheat during 1999–
2000 ~Government of Haryana, 2000–2001; Government of India, 2001!+ Therefore, this
study will be confined to rice and wheat crops grown in the state+ The specific objectives
are ~1! to analyze the impact of price and nonprice factors on the marketed surplus of
paddy and wheat, and ~2! to simulate price and nonprice factors to attain the specific
goals of output supply and marketed surplus+ De Janvry and Kumar ~1981! developed a
model that considers the effect of both factor and product prices on the marketed surplus+
A few studies such as Kumar and Mruthyunjaya ~1989! and Reddy, Chengappa, and Achoth
~1995! on the response of marketed surplus to factor and product price movements have
used the model developed by de Janvry and Kumar ~1981! but none of the studies made
use of panel data+ So far, in Haryana State of India no study has been conducted consid-
ering the effect of both input and output price movements to measure the marketed sur-
plus behavior+ In addition, the present study makes use of farm level panel data under the
assumption that intercept terms vary across firms+ Thus, this is a departure from the pre-
vious studies conducted on the subject of marketed surplus using farm level panel data+

2. METHODOLOGY

2.1 Marketed Surplus

2.1.1 The Model The important studies conducted on marketed surplus include;
Krishna ~1965!, Bardhan ~1970!, Behrman ~1966, 1968!, Haessel ~1975!, and Shah and
Pandey ~1976!+ The marketed surplus model applied for food grains in northern India
by Bardhan ~1970! was as follows:

M1 ⫽ Q 1 冉 冊 冋
P1
P2
⫺ C1 P1 ,I ⫽ P1Q 1 冉 冊
P1
P2
⫹ P 2Q 2 冉 冊册
P1
P2

Where: M1 ⫽ marketed surplus of food grains, Q 1 ⫽ output of food grains; Q 2 ⫽ output

of crops other than food grains, C1 ⫽ consumption of food grains, P1 ⫽ price of food
grains, P2 ⫽ price of crops other than food grains, I ⫽ farmer’s total income+ But the
model only considers product price changes and output level as the key factors to exam-
ine marketed surplus response+ In the present study, the model developed by de Janvry
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 255

and Kumar ~1981!, which considers the effect of both product and factor price move-
ments on marketed surplus, has been used+ The model can be extended as given below:

M⫽Y 冋 w f
册
, ,z1 ,z2 ,z3 ⫺ C~P,I!
p p
~1!

I ⫽ PY 冋 w f
册
, ,z1 ,z2 ,z3 ⫺ wX1
P P
冋
w f
册
, ,z1 ,z2 ,z3 ⫺ f X2
P P
w f
冋
, ,z1 ,z2 ,z3
P P
册
⫺ z 1 ⫺ z 2 ⫺ z 3R ~2!

where M ⫽ marketed surplus of a crop, Y ⫽ production; P ⫽ product price; w and f ⫽

wage rate and unit fertilizer price; z1 ⫽ irrigation expenditure; z2 ⫽ capital expenditure;
z3 ⫽ land area; z3R ⫽ paid land rent; X1 ⫽ level of human labor; X2 ⫽ level of fertilizer
use; C ⫽ home consumption of a crop produce; and I ⫽ income from a crop+ The mar-
keted surplus growth model can be expressed as:

]M ]P ]w ]f ]z1 ]z2 ]z3 ]R ]T

⫽ EM
P
⫹ EM
w
⫹ EM
f
⫹ EM
z1
⫹ EM
z2
⫹ EM
z3
⫹ EM
R
⫹ EM
T
M P w f z1 z2 z3 R T

~3!

Where E MP
⫽ ]M
__ P
]P M is the market surplus elasticity with respect to P+ To obtain the elasticity
with respect to other factors0parameters, P is substituted by w ~wage rate!, f ~fertilizer
price!, z1 ~irrigation expenditure!, z2 ~capital expenditure!, z3 ~land area!, R ~paid land
rent!, and T ~technology! ~for formulae see de Janvry & Kumar, 1981!+
Similarly the income growth model is expressed as:

]I ]P ]w ]f ]z1 ]z2 ]z3 ]R ]T

⫽ E IP ⫹ E Iw ⫹ E If ⫹ E Iz1 ⫹ E z12 ⫹ E Iz3 ⫹ E IR ⫹ E IT ~4!
I P w f z1 z2 z3 R T
g
Where E I ⫽ ]I g
_ _
]g I ~g ⫽ P, w, f, z1 , z2 , z3 , R, and T! are the crop income elasticities with
respect to g+

2.2 Profit Function

2.2.1 The Model For estimating marketed surplus and crop income elasticities, we
need factor demand and output supply elasticities+ For deriving input demand and output
supply equations, the profit function approach was used+ According to the duality theo-
rem ~see Lau, 1978; Chambers, 1988! under certain regularity conditions, the profit func-
tion corresponds uniquely to a given production function and its parameters contain
sufficient information to describe the farm’s production technology at the profit maxi-
mizing level in the set of production possibilities+ The regularity conditions are: the profit
function is twice differentiable, continuous, linear homogeneous and convex in prices,
increasing in fixed quantity and output prices and decreasing in input prices+ In this study,
the normalized quadratic form of the profit function is used because of its flexible func-
tional form ~Lau, 1976, 1978!+ It has also the Hessian of constants implying that convex-
ity in prices can be tested and0or imposed globally+
256 GOYAL AND BERG

The Normalized Quadratic Profit Function with prices and profit normalized by the
output price is expressed as:

2 3 2 2 3 3 2 3
1 1
P ⫽ a 0 ⫹ ( a iq i ⫹ ( b iz i ⫹ ( ( aijqiqj ⫹ 2 i⫽1 ( bijzizj ⫹ i⫽1
( j⫽1 ( j⫽1
( cijqizj ~5!
i⫽1 i⫽1 2 i⫽1 j⫽1

Where: P and qi are normalized profit and normalized input prices using the price of
output as numeraire; the zi are fixed inputs and a0 , a1 , aij , bi , bij and cij are the param-
eters to be estimated+
Following Shephard’s Lemma ~1953!, the negative of the 1st partial derivative of the
normalized profit function with respect to the normalized input prices gives a system of
demand functions for variable inputs as given below:

Xi ⫽ ⫺
]P
]qi
2

冋 2
⫽ ⫺ ai ⫹ ( aijqi ⫹ ( cijzj
j⫽1 j⫽1
册 ~6!

The function is homogeneous of degree zero in prices+ The homogeneity condition is

built into the model because qi is the input price normalized by the output price and hence
cannot be tested+ The symmetry condition can be imposed and tested ~aij ⫽ aji , for all i
and j!+ Using the definition of the normalized profit function, the supply equation can be
derived residually as:

2 2 3 3 3
1 1
Y ⫽ a0 ⫺ ( ( aijqiqj ⫹ ( bizi ⫹ ( ( bijzizj ~7!
2 i⫽1 j⫽1 i⫽1 2 i⫽1 j⫽1

2.3 Estimation
The profit function and input demand equations are estimated jointly+ The restrictions are
imposed that common parameters are equal across the equations+ Symmetry restrictions
are also imposed ~aij ⫽ aji for all i and j! in equation 6+ In total, 10 restrictions were
imposed+ Because of linear constraints and the symmetry restrictions across equations
and the possibility that the error terms of the profit function and the related input demand
equations may be correlated, Zellner’s estimation technique for Seemingly Unrelated
Regressions ~Zellner, 1962! is employed+
Because of the availability of the panel data, it was possible to estimate the model with
variable intercepts+ In the system of equations, the intercept term is assumed to vary across
farms reflecting the differences in farm characteristics, i+e+, mainly the managerial dif-
ferences and differences in the quality of land+ This assumption is explicitly accounted
for by a fixed effects model where differences in cross-sectional units can be adequately
captured by specifying a different intercept coefficient for each cross sectional unit+ The
necessary transformation of the data is made for estimating the fixed effects model ~for
details, see Judge, Hill, Griffiths, Lutkepohl, & Lee, 1988!+ We can test the null hypoth-
esis that the intercept term is equal for all individuals using the log likelihood test ratio
statistic, which follows a chi-square distribution with “d” degrees of freedom ~d ⫽ num-
ber of intercepts or individuals!+ If the null hypothesis is not rejected, i+e+, all the inter-
cepts are same, then the whole data can be treated as one random sample with N
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 257

observations+ The accepted model is then tested for the validity of restrictions imposed
through the Wald test and other regularity conditions+

2.4 The Data

The farm level panel data collected for “Comprehensive Scheme On Cost of Cultivation
of Principal Crops” in Haryana, India, for the period 1996–1997 to 1998–1999 were used
for the present study+ The survey on the “Cost of Cultivation of Principal Crops” has been
undertaken by the Directorate of Economics and Statistics, Ministry of Agriculture, Govt+
of India+ The required information on physical input-output data, factor-product prices,
marketed surplus, and other related variables were collected from the scheme located at
the CCS Haryana Agricultural University, Hisar, India+ The data were complied for 200
farm households each year+ In total, there are 592 observations for wheat and 281 for
paddy+
Output of a crop includes the main product as well as the by-product ~i+e+, straw!+ The
by-product was added to the main product after dividing the total value of the by-product
by the price of the main product+ Human labor included both hired as well as family labor+
Women and child labor hours were converted in terms of man equivalent unit+1 Fertilizer
includes nitrogen, phosphate, potash, and zinc sulphate+ Irrigation expenditure includes
both own and paid expenses+ Capital expenditure includes value of seeds, expenditure on
bullock labor, value of plant protection measures, expenses on tractor and other machin-
eries, land revenue,2 and other expenses not included elsewhere+
Two variable inputs and three fixed inputs are included in the model+ The two variable
inputs are human labor ~hours! and fertilizer use ~kg!+ The three fixed inputs included are
irrigation expenditure ~Rs+!, capital expenditure ~Rs+!, and land area ~ha!+ Profit was defined
as the value of output minus the value of variable inputs; it is the return to the fixed
factors+ The marketed surplus was defined as total production less the quantities of output
retained for home consumption+

3. MODEL RESULTS

3.1 Testing of the Model

The profit function and inputs demand equations were estimated jointly using SUR esti-
mation technique with and without fixed effects by imposing symmetry and other linear
restrictions+ The model was tested assuming that the individuals have varying intercepts+
The log likelihood ratio test statistic reveals that the null hypothesis of constant intercepts
is rejected for both crops+3 This means that the individuals have different intercepts+
Next, the model is tested for the validity of restrictions implied by hypothesis of profit
maximization+ The null hypothesis states that the parameters of the demand equations are
symmetric and equal to the corresponding parameters appearing in the profit function+
Applying the Wald test that follows chi square distribution ~degrees of freedom equal to

1
Main equivalent units are defined as: 1 woman or 1 child was treated equal to 0+67 or 0+50 man equivalent
units+
2
It is the payment made to the Government+
3
The Log likelihood ratio test statistic value for wheat is 1,450+62 and for paddy is 736+96+ The critical value
of Chi square with 200 and 93 degrees of freedom at +01 level of significance are 249+45 and 127+63, respectively+
258 GOYAL AND BERG

TABLE 1+ Parameter Estimates of Profit Function and Demand Equations for Wheat in
Haryana, India
Explanatory variables
Profit Labor Fertilizer Output Estimated
Parameter function demand demand supply coefficients T value
a1 q1 ⫺892+09 ⫺2+620
a2 q2 4,824+62 6+101
a11 1
_ 2
q ⫺q1 ⫺ 12_ q21 9,712+31 3+091
2 1
a22 1
_ 2
q ⫺q2 ⫺ 12_ q22 33,653+12 5+306
2 2
a12 q 1q 2 ⫺q2 ⫺q1 ⫺q1q2 4,271+12 1+699
c11 q 1z 1 ⫺z1 ⫺0+93E⫺02 ⫺1+712
c12 q 1z 2 ⫺z2 0+35E⫺02 1+524
c13 q 1z 3 ⫺z3 ⫺196+82 ⫺12+453
c21 q 2z 1 ⫺z1 ⫺0+657E⫺02 ⫺1+398
c22 q 2z 2 ⫺z2 0+213E⫺02 1+085
c23 q 2z 3 ⫺z3 ⫺356+16 ⫺26+400
b1 z1 z1 0+839E⫺03 1+364
b2 z2 z2 0+001296 4+954
b3 z3 z3 27+95 16+179
b11 1
_ 2
z 1
_ 2
z ⫺0+505E⫺06 ⫺1+811
2 1 2 1
b22 1
_ 2
z 1
_ 2
z ⫺0+384E⫺09 ⫺0+019
2 1 2 1
b33 1
_ 2
z 1
_ 2
z ⫺3+86 ⫺1+512
2 3 2 3
b12 z 1z 2 z 1z 2 0+293E⫺07 0+282
b13 z 1z 3 z 1z 3 0+243E⫺02 3+384
b23 z 2z 3 z 2z 3 ⫺0+139E⫺03 ⫺0+333
Note. Number of observations ⫽ 592; number of farms ⫽ 200+

number of restrictions!, the null hypothesis of profit maximization is valid and cannot be
rejected for both crops+4 Monotonocity is violated for 1+72 and 7+75% of the observations
for output and fertilizer demand only in the case of paddy+ The sufficient condition for
convexity is satisfied, because the Hessian matrix of second order partial derivatives of
normalized profit with respect to normalized prices is positive definite+ Thus, the tested
assumptions are not rejected+ Hence, the fixed effects model with symmetry and other
restrictions imposed is finally used for calculating the elasticities of factor demand and
output supply with respect to relative prices and fixed factors+ The estimates of elastici-
ties are computed at the mean level of prices and quantities of fixed inputs+

3.2 Factor Demand and Output Supply Elasticities

The estimated coefficients of the jointly estimated profit function and demand equations
are given in Tables 1 and 2+ The elasticity estimates of the factor demand equations are
presented in Table 3+ All own price elasticites of demand for variable inputs in both crops
have negative signs indicating that an input price increase causes its demand to decline+

4
Wald test statistic ~Chi square distribution! value for wheat is 4+54 and for paddy is 19+94+ The critical value
of Chi square with 10 degrees of freedom at 0+01 level of significance is 24+20+
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 259

TABLE 2+ Parameter Estimates of Profit Function and Demand Equations for Paddy in
Haryana, India
Explanatory variables
Profit Labor Fertilizer Output Estimated
Parameter function demand demand supply coefficients T value
a1 q1 ⫺458+39 ⫺1+184
a2 q2 ⫺193+56 ⫺0+249
a11 1
_ 2
q ⫺ q1 ⫺ 12_ q21 19,724+98 3+630
2 1
a22 1
_ 2
q ⫺q2 ⫺ 12_ q22 37,805+46 3+539
2 2
a12 q 1q 2 ⫺q2 ⫺q1 ⫺q1q2 5,110+74 1+075
c11 q 1z 1 ⫺z1 ⫺0+43E⫺01 ⫺4+569
c12 q 1z 2 ⫺z2 ⫺0+26E⫺02 ⫺1+376
c13 q 1z 3 ⫺z3 ⫺399+33 ⫺9+294
c21 q 2z 1 ⫺z1 ⫺0+437E⫺01 ⫺4+807
c22 q 2z 2 ⫺z2 ⫺0+259E⫺02 ⫺1+383
c23 q 2z 3 ⫺z3 ⫺419+27 ⫺10+082
b1 z1 z1 0+688E⫺02 10+281
b2 z2 z2 ⫺0+194E⫺04 ⫺0+135
b3 z3 z3 12+43 3+947
b11 1
_ 2
z 1
_ 2
z ⫺0+367E⫺06 ⫺1+508
2 1 2 1
b22 1
_ 2
z 1
_ 2
z 0+621E⫺08 0+602
2 1 2 1
b33 1
_ 2
z 1
_ 2
z 3+02 0+535
2 3 2 3
b12 z 1z 2 z 1z 2 ⫺0+226E⫺07 ⫺0+343
b13 z 1z 3 z 1z 3 0+106E⫺02 0+774
b23 z 2z 3 z 2z 3 ⫺0+151E⫺03 ⫺0+349
Note. Number of observations ⫽ 231; number of farms ⫽ 93+

An increase in the output price leads to an increase of the demand for variable inputs+
Interestingly, the magnitudes of own price elasticities and elasticities with respect to the
output price were found almost the same in both crops+ The magnitudes of cross price
elasticities between the prices of variable inputs indicate that there exists a week com-
plementarity, which means that the cross price effects of variable input prices on their

TABLE 3+ Elasticities of Factor Demand for Wheat and Paddy

Elasticity with respect to
Output Wage Fertilizer Irrigation Capital
Particulars price rate price expenditure expenditure Land
Wheat
Human labor 0+3426 ⫺0+2786 ⫺0+0640 0+0410 ⫺0+0477 0+6725
Fertilizer 0+5067 ⫺0+0990 ⫺0+4076 0+0229 ⫺0+0231 0+9837
Paddy
Human labor 0+3131 ⫺0+2744 ⫺0+0387 0+2388 0+0236 0+8145
Fertilizer 0+4903 ⫺0+0976 ⫺0+3927 0+3323 0+0325 1+1738
260 GOYAL AND BERG

demand are fairly small+ Among the fixed factors, the impact of irrigation on input demand
is very small in the case of wheat but relatively strong in the case of paddy+ Exogenous
increase in land has a significant impact on the demand of both inputs in either crop but
the impact is stronger for fertilizer demand than for human labor+ Furthermore, the impact
was stronger in the case of paddy compared to wheat+ The farmers can increase their farm
size by purchasing0leasing in land+ But due to increasing prices of land, purchase of land
is difficult and selling of land is socially discredited unless there is dire economic need+
Thus, farmers can increase their land area mainly through leasing in activities+ In the
state, there is no ban on leasing but the tenant acquires a right to purchase the leased land
from the owner within a specified period of creation of tenancy+ Lease contracts of larger
duration are not made by the owner in view of rising land rents and also because of fear
that longer leases would entitle the tenants to the rights for cultivation of land+ The land
owners who engage themselves in some alternative employment find it advantageous to
lease out land+ Similarly, the other farmers find it advantageous to increase the opera-
tional size of holding by leasing in land+ Having greater access to land has certain impli-
cations+ Leasing in activity can provide a respite to small and marginal farmers, who are
short of land and endowed with surplus labor thereby leading to greater utilization of land
and other inputs+ On the other hand, the large farmers who have desire and ability to
maximize income can do so through expanding the size of land under cultivation+
The increase in output price results in increasing marginal value productivity of resources+
This induces the farmers to increase output by using more inputs+ Therefore, the output
price has a positive influence on inputs demand+ However, Table 4 shows that the output
supply is inelastic to relative changes of prices yet it had anticipated sign+ Irrigation expen-
diture was found to be very effective in increasing the supply of paddy ~0+44!, whereas in
the case of wheat the impact of irrigation is only 0+14 ~Table 4!+ It implies that the pos-
sibilities of increasing output by investing more in irrigation and capital are very limited
in the case of wheat whereas irrigation expenditure will result in increase in output in
case of paddy+ Diminishing returns to scale were observed for wheat, whereas in the case
of paddy, increasing returns to scale were found to exist+
These elasticity estimates provide information for determining the influence of speci-
fied changes in output and variable inputs prices, e+g+, the estimated elasticities of demand

TABLE 4+ Elasticities of Output Supply, Marketed Surplus, and Crop Income for Wheat and
Paddy
Elasticity with respect to
Output wage Fertilizer Irrigation Capital
Particulars price rate price expenditure expenditure Land
Wheat
Output supply 0+0820 ⫺0+0419 ⫺0+0401 0+01431 0+0897 0+5342
Marketed surplus 0+2428 ⫺0+0591 ⫺0+0588 0+2209 0+1453 0+8195
Crop income 1+7211 ⫺0+2200 ⫺0+1356 0+1361 ⫺0+1175 0+7894
Paddy
Output supply 0+1038 ⫺0+0640 ⫺0+0397 0+4455 ⫺0+0524 0+6141
Marketed surplus 0+1192 ⫺0+0551 ⫺0+0388 0+5034 ⫺0+0368 0+6935
Crop income 2+6085 ⫺0+5340 ⫺0+2131 0+6367 ⫺0+6491 0+8895
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 261

equations can lead us to know the growth of inputs demand for given changes in input
and output prices+ If the observed price structure of the 1990s is assumed to continue in
future, the demand for farm labor will remain almost unaffected in case of wheat while
in the case of paddy, it will displace human labor at the rate of 1% per annum+ As
regards fertilizer, the demand will increase at the rate of 3+5 and 2+5% per annum in
wheat and paddy, respectively+ The demand of inputs implies that in the case of fertil-
izer, the negative effects of its price will be outpaced by the positive effect of output
price in both the crops whereas in the case of labor demand, the negative effect of its
price on farm labor employment will be absorbed by the positive effect of output price
on wheat farms, but the reverse is the case on paddy farms+ It indicates that on the
whole fertilizer prices are in favor of farmers+ The implication of the above findings is
that the adverse price movement affects inputs use and investment in production pro-
cess+ Therefore, to have an efficient utilization of resources, output price must be suf-
ficiently high to cancel out the negative effects occurring as a result of rise in inputs
prices+

3.3 Marketed Surplus Response

Using the estimated elasticities of factor demand and output supply, elasticities of mar-
keted surplus with respect to prices and fixed factors were computed+ The equations of
the model consisting of output supply, marketed surplus, and crop income are given as
below in growth form:

Output supply

Y^ w ⫽ 0+0820P^ ⫺ 0+0419w_ ⫺ 0+0401 ^f ⫹ 0+1431z_ 1 ⫹ 0+0897z_ 2 ⫹ 0+5342z_ 3 ⫹ E WY

T

Y^ P ⫽ 0+1038P^ ⫺ 0+0640w_ ⫺ 0+0397 ^f ⫹ 0+4455z_ 1 ⫺ 0+0524z_ 2 ⫹ 0+6141z_ 3 ⫹ E WY

T

Marketed surplus

M^ w ⫽ 0+2428P^ ⫺ 0+0591w_ ⫺ 0+0588 ^f ⫹ 0+2209z_ 1 ⫹ 0+1453z_ 2 ⫹ 0+8195z_ 3

⫹ 0+0007R^ ⫹ E WM
T

T
E WM ⫽ 1+5168E Y
T
⫹ 0+0067E X
T
1
⫹ 0+0041E X
T
2
⫹ 0+0007E RT

M^ P ⫽ 0+1192P^ ⫺ 0+0551w_ ⫺ 0+0388 ^f ⫹ 0+5034z_ 1 ⫺ 0+0368z_ 2 ⫹ 0+6935z_ 3

⫹ 0+0010R^ ⫹ E PM
T

T
E PM ⫽ 1+0821E Y
T
⫹ 0+0209E X
T
1
⫹ 0+0084E X
T
2
⫹ 0+0010E RT
262 GOYAL AND BERG

Crop income

^Iw ⫽ 1+7211P^ ⫺ 0+2200w_ ⫺ 0+1356 ^f ⫹ 0+1361z_ 1 ⫺ 0+1175z_ 2 ⫹ 0+7894z_ 3

⫹ 0+0240R^ ⫹ E WI
T

T
E WI ⫽ 1+7311E Y
T
⫺ 0+2231E X
T
1
⫺ 0+1359E X
T
2
⫺ 0+0240E RT

^IP ⫽ 2+6085P^ ⫺ 0+5340w_ ⫺ 0+2131 ^f ⫹ 0+6367z_ 1 ⫺ 0+6491z_ 2 ⫹ 0+8895z_ 3

⫹ 0+0263R^ ⫹ E pI
T

T
E PI ⫽ 2+6100E Y
T
⫺ 0+5346E X
T
1
⫺ 0+2143E X
T
2
⫺ 0+0263E RT

The dot on the variables in the above expressions indicate the rate of change ~growth rate!
of the variable ~i+e+, P^ ⫽ ]P
_
P !+ The elasticities of marketed surplus and crop income for
wheat and paddy are presented in Table 4+ The response of the marketed surplus of wheat
to its price is 0+24, which indicates that a 1% increase in output price, ceteris paribus,
leads to an increase marketed surplus by 0+24%+ The response of the marketed surplus of
wheat to its price is about three times the response of output supply+ Changes in input
prices have only a small influence on the output supply and the marketed surplus+ How-
ever, the impact of input prices is also higher on marketed surplus than on output supply+
The marketed surplus of wheat exhibits almost the same response to either input as the
elasticity coefficient with respect to the wage rate is ⫺0+0591 and with respect to the
fertilizer price is ⫺0+0588+ From the elasticity coefficients, it is discernible that any change
in prices causes the marketed surplus to change at a higher rate than the output supply+
With regard to the effect of fixed factors, all three factors exhibit a positive influence
on the marketed surplus of wheat+ The effect of land area under the crop is very strong as
the elasticity coefficient is close to one ~0+82!+ Similarly, the marketed surplus responds
to fixed the factors also stronger than the output+ Unlike for wheat, in the case of paddy
there is a small difference between the elasticities of marketed surplus and output supply,
because only a small proportion of the paddy production is kept for home consumption+
The higher the sold output ratio, the smaller is the difference between the elasticities of
marketed surplus and output supply+
The changes in income from wheat and paddy crops in relation to movements in input-
output price and nonprice factors was also examined using factor demand and output
supply elasticities+ It was found that the impact of price changes on net income is higher
than the impact on marketed surplus and output supply for both crops+ But the price effect
~input and output! was found higher for paddy compared to wheat+ The output price was
found to have an overwhelming impact on the income+ A 1% increase of the output price
results in about 1+72% increase of income for wheat and 2+60% for paddy+ The coeffi-
cients of fixed factors show that net income exhibits a positive response to irrigation
expenditure and a negative to capital for both crops+ This implies that net income can be
increased by increasing irrigation expenditure+ Land again has a reasonably strong effect
on the net income+
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 263

TABLE 5+ Effect of Pure Inflation on Marketed Surplus of

Wheat and Paddy
Factors Wheat Paddy
Product price P
~E M ! 0+1140 ⫺0+0039
w
Wage ~E M ! 0+0067 0+0209
f
Fertilizer price ~E M ! 0+0041 0+0084
T
Land rent ~E M ! 0+0007 0+0010
Total 0+1255 0+0264

3.4 Policy Measures

The estimated elasticities on marketed surplus can be used to measure the impact of a
pure inflationary effect ~]P0P ⫽ ]w0w ⫽ ]f0f ⫽ ]R0R! on the marketed surplus of the
crops+ As under pure inflation, factor and product prices change at the same proportion,
and there will be no change in the use of inputs and the output supply+ Since all the
relative prices remain constant, the elasticities of output and derived demand with respect
to relative prices will be equal to zero+ However, pure inflation has an effect on mar-
keted surplus that depends on the magnitude of income and price effect on consump-
tion+ Since the price effect on marketed surplus is positive while the income effect is
negative, the net effect resulting from the balance of these two effects determines the
influence of pure price inflation on marketed surplus+ The effect of pure inflation on the
marketed surplus of wheat and paddy is shown in Table 5+ It can be seen from Table 5
that pure inflation has a positive effect on the marketed surplus of both crops through
dominance of price effect on consumption+ The elasticity of marketed surplus with respect
to rate of inflation worked out to be 0+1256 and 0+0263 for wheat and paddy, respec-
tively+ It means that marketed surplus of wheat will increase at the rate of 0+13% for a
1% increase in pure inflation without any productivity change+ In the case of paddy, the
impact of pure inflation on marketed surplus is very small ~0+03!+ Although the agricul-
tural price policy aims to maintain parity between input and output prices, the parity in
prices alone would not be sufficient to generate desired marketed surplus+ This fact is
evident from the above findings that imply that even if the government causes propor-
tionate change in relative prices, the increase in marketed surplus is marginal+ Hence, it
is discernible that besides parity in prices, productivity improvement is also of para-
mount importance for increasing marketed surplus+ It is seen from the estimates that a
1% increase in productivity is expected to increase the marketed surplus of wheat by
about 1+50% and paddy by about 1% ~derived from equations for marketed surplus elas-
T T
ticity with respect to productivity, i+e+, E WM and E PM on p+ 12!+ A 1% increase of the
product price increases the crop income by 1+72% in the case of wheat and by 2+61% in
the case of paddy ~Table 4!+

3.4.1 Product Price Adjustment The model equations for marketed surplus, crop
income, and output supply can be used to examine the price and nonprice adjustments
needed to maintain the desired level of marketed surplus and production under factor
price inflation+
264 GOYAL AND BERG

The relative change in marketed surplus is given as follows:

Wheat: ]M0M ⫽ 0+2428 ]P0P ⫺ 0+0591]w0w ⫺ 0+0588 ]f0f ⫹ 0+0007 ]R0R

Paddy: ]M0M ⫽ 0+1192 ]P0P ⫺ 0+0551 ]w0w ⫺ 0+0388 ]f0f ⫹ 0+0010 ]R0R

The above expressions can be solved for the product price needed to maintain a constant
level of marketed surplus ~i+e+, ]M ⫽ 0! under the assumption that ]w0w ⫽ ]f0f ⫽ ]R0R+
From the above expression, it can be derived that in order to maintain constant level of
marketed surplus without any change in nonprice factors ~i+e+, irrigation expenditure, cap-
ital expenditure, and land area under the crop!, the wheat price needs to be increased by
48+31% and the paddy price by 77+94% of the rate of factor price inflation+ The above
results imply that the constant level of marketed surplus ~]M⫽0! can be maintained if
output price is compensated by 4+83% for wheat and 7+79% for paddy for a 10% in factor
price inflation+ To raise output prices to compensate farmers for factor price inflation is a
very important objective of the agricultural price policy+ It is contended that producers’
price incentive as an important instrument of agricultural policy should be accompanied
by providing grains at affordable prices to both rural and urban poor to counteract the
adverse effects of price increase+ In India, the Public Distribution System ~PDS! ensures
the availability of essential commodities to the consumers+ The families below the pov-
erty line ~BPL! receive rice and wheat at a lower price than the economic cost, whereas
above the poverty line ~APL!, the population is supplied at a price that is closer to the
economic cost+ With the above price structure, i+e+, input price inflation by 10% and out-
put price inflation by 4+83% for wheat and 7+79% for paddy, the crop income would
increase by 5 and 13% for wheat and paddy, respectively+
The observed annual changes in prices during the 1990s were: ]w0w ⫽ 0+20, ]f0f ⫽
0+06, ]R0R ⫽ 0+33+ The estimates of the marketed surplus growth equation can also be
used to derive the changes of the product price that would be needed to maintain a con-
stant level of marketed surplus at the observed rates of factor price inflation if nonprice
factors remain constant+ It was found that in order to maintain a constant level of mar-
keted surplus at the observed factor price inflation, the wheat price needs to be increased
by 6+23% and paddy price by 11% per annum+ However, the actual increase of output
prices was higher than the required rate+ The price policy seems to be favorable if the
constant level of marketed surplus is required to be maintained at the observed factor
price inflation without any productivity change+ At the observed price changes for both
input and output prices, the marketed surplus will increase at the rate of about 2% per
annum for wheat and 0+4% for paddy+ With this price structure, the crop income will
increase by about 20% for both crops+ It seems that with the price policy followed by the
government, the marketed surplus of wheat will increase at a slightly higher rate than
the growth rate of the population, but in the case of paddy the increase is too low to match
the population growth+ Even for wheat, the growth of marketed surplus will not be suf-
ficient to account for the increase of per capita net national income+ Indeed, policy plan-
ners are always in a fix in deciding what the appropriate levels of agricultural prices
should be, because the Government has to reconcile the conflicting interests of producers
and consumers+ High product prices generate more marketed surplus and result in high
crop income+ But this may cause a lack of effective demand at the expense of lower the
purchasing power of the bulk of consumers, thus adversely affecting their overall wel-
fare+ Low product prices may result in a lower growth of the marketed surplus to meet the
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 265

TABLE 6+ Sources of Growth of Marketed Surplus and Crop Income

Marketed surplus Crop income
Sources of growth Wheat Paddy Wheat Paddy
Factor price ⫺0+0153 ⫺0+0133 ⫺0+0521 ⫺0+1195
Output price 0+0363 0+0167 0+2580 0+3652
Irrigation 0+0023 0+0052 0+0014 0+0066
Capital 0+0071 ⫺0+0018 ⫺0+0058 ⫺0+0318
Productivity 0+0221 0+0151 0+0396 0+0365
Acreage 0+0165 0+0042 0+0134 0+0053
All 0+0691 0+0260 0+2545 0+2623

demand of the growing population+ This causes a low return to producers that, in turn,
adversely affects the producer’s welfare+ Therefore, prices alone may not sufficiently stim-
ulate growth in agricultural production, which is the main objective of agricultural devel-
opment policy+ Therefore, technological improvement and adjustments of nonprice factors
are also of paramount importance for increasing the marketed surplus+
To understand the role of price and nonprice factors in increasing the marketed surplus
and crop income, the growth of marketed surplus and crop income is decomposed into
different constitutes at the existing growth rate for both price and nonprice factors+ The
results are presented in Table 6+ The growth of marketed surplus due to all factors is
estimated at 0+069 for wheat and 0+026 for paddy+ The growth of income is estimated to
be 0+25 for wheat and 0+26 for paddy+ The growth in marketed surplus in the case of
wheat is substantially higher than the population growth+ This calls for a continuation of
the price support program and procurement by the government to prevent the decline in
wheat prices+ The price support system ~Minimum Support Price! is a long-term guaran-
tee to enable farmers to peruse their efforts to increase production+ These prices act as an
assurance to farmers that prices will not fall below the minimum level fixed by the gov-
ernment in the years of bumper production or due to lack of the purchasing power of the
consumers+ Thus, support prices provide an incentive to farmers to increase production+
In the case of paddy, the growth in marketed surplus is marginally higher than the pop-
ulation growth+ But taking into account the growth in income of consumers, economic
development, etc+, this growth in marketed surplus may not be sufficient to meet the grow-
ing demand of paddy+ As the net effect of prices is positive, it implies that the rise in
product price has outpaced factor price inflation+ Among the nonprice factors, in the case
of wheat, productivity and area have very strong influences on the marketed surplus+ In
the case of paddy, these influences are substantially lower+

3.4.2 Productivity Adjustment The model can also be simulated to investigate the
required rate of productivity improvement to maintain different levels of marketed sur-
plus without any change in output price under the situation of factor price inflation+ The
different situations are enumerated below and the results are presented in Table 7+

1+ At the observed factor price inflation, a constant level of marketed surplus

~]M ⫽ 0! can be maintained by increasing the productivity level by about 1% per
annum in the case of wheat and 1+20% for paddy+ Wheat productivity in the state
has increased at the rate of 1+60% annum whereas growth in paddy productivity
266 GOYAL AND BERG

TABLE 7+ Required Rate of Productivity to Achieve Different Levels of Marketed Surplus

Under Different Situations
Required productivity rate
Marketed Product Factor
Sr+ No surplus price price Wheat Paddy
1 ]M ⫽ 0 ]P ⫽ 0 ]p ⫽ observed 0+01 0+012
2 ]M ⫽ 0 ]P ⫽ 0 ]p ⫽ 0+1 0+0077 0+0086
3 ]M ⫽ 0 ]P ⫽ 0 ]w ⫽ ]f ⫽ ]R ⫽ 1 0+0767 0+086
4 ]M ⫽ 0+02 ]P ⫽ 0 ]p ⫽ observed 0+02 0+03
5 ]M ⫽ 0+02 ]P ⫽ observed ]p ⫽ observed 0 0+015
6 ]M ⫽ 0+04 ]P ⫽ observed ]p ⫽ observed 0+01 0+03

was negative during 1990s+ Therefore, in the case of paddy, there is a need to
develop yield-increasing technology, irrigation facilities, etc+, even to maintain
marketed surplus at a constant level at the observed factor price inflation+
2+ For maintaining a constant level of marketed surplus under the assumption that
factor prices rise by only by 10%, the annual rate of productivity growth in output
should be 0+77 and 0+86% for wheat and paddy, respectively+
3+ If factor price inflation is such that ]w0w ⫽ ]f 0f ⫽ ]R0R ⫽1, then the required rate
of technological change should be 7+67% for wheat and 8+60% for paddy in order to
maintain a constant level of marketed surplus+ However, based on past productivity
trend, it seems very difficult to attain these required productivity levels unless yield-
increasing technology, irrigation facilities, etc+, are made available to farmers+
4+ To attain a growth of marketed surplus equal to the growth of population ~about
2%!, which is the basic objective of agricultural policy, at the observed factor price
inflation, the required rate of productivity growth in output supply should be about
2% for wheat and 3% for paddy+ Again, in paddy strenuous efforts are needed to
achieve the required productivity growth+
5+ Finally, if the observed factor and output price structure continues in the future, to
attain growth in marketed surplus equal to growth in population, the productivity
improvement needed is almost zero for wheat, but for paddy the necessary rate of
productivity increase is about 1+5% per annum+ However, to attain a 4% per annum
growth in marketed surplus that may be required to meet the growing demand as a
result of growth in population and income of the consumers, the required produc-
tivity growth needs to be about 1% for wheat and about 3% for paddy+

The results of the simulation models indicate that product prices need to be increased
by 6+23 and 11% per annum for wheat and paddy, respectively, in order to maintain ]M ⫽
0 at the observed factor price inflation without any productivity change+ But the objective
of the government is to generate market supply to match the demand of growing popu-
lation, which causes still higher product price rises+ If we want full price stability, the
growth in marketed surplus equal to population growth at the observed factor price infla-
tion can be achieved by productivity growth of 2 and 3% for wheat and paddy, respec-
tively ~Table 7!+ On the whole, the policy makers have to decide which combination of
prices and productivity is appropriate depending upon the specific goals of production
and market supply+ The above policy measures have certain implications+ It is a well
established fact that more progressive farmers and developed regions are already close to
 MARKETED SURPLUS RESPONSE OF CEREALS IN INDIA 267

a technological ceiling; productivity improvement can be achieved by less progressive

farmers and in underdeveloped areas+ The price adjustment would act only for already
advanced regions+ It means that compensating the farmers for factor price inflation via
product price increase would cause the existing inequality to deepen further+ Therefore,
spreading yield-increasing technology to underdeveloped regions would result in achiev-
ing higher production and reducing economic inequality+

4. CONCLUSION
The impact of price changes on the supply of output is very low+ However, the marketed
surplus responds to changes of prices stronger than output supply+ Pure inflation has a
positive effect on the marketed surplus of both the crops, i+e+, wheat and paddy+ The mar-
keted surplus of wheat tends to increase by about 13% of the rate of inflation and that of
paddy by 3%+ In order to maintain a constant level of marketed surplus without changes
in nonprice factors, the wheat price should be compensated by about 48 and 78% of the
rate of factor price inflation+ But this adjustment of the product price would be undesir-
able from a social point of view unless it is commensurate with safeguarding the interests
of vulnerable sections of the society by providing food grains at affordable prices+ At the
observed price structure without technological change, the marketed surplus of wheat
will increase almost equal to the population growth, and in the case of paddy it will grow
at a very small rate ~0+4%!+ Besides price adjustment, technological improvement and
nonprice factors’ adjustment are also of paramount importance for increasing the output
supply and, hence, the marketed surplus+ In the case of wheat, the past yield trend indi-
cates that there should be no difficulty to attain the required productivity level, but in the
case of paddy strenuous efforts are needed to increase the productivity level+

ACKNOWLEDGMENTS
This work was undertaken at University of Bonn, Germany, while the first author was on
Research Fellowship awarded by the Alexander von Humboldt-Stiftung Foundation, Ger-
many+ The authors thank Heinz-Peter Witzke and Hendrik Wolff for valuable discussions
and support in using the software for analyzing the data+ The valuable comments and
suggestions from the anonymous referees are also gratefully acknowledged+

REFERENCES
Bardhan, K+ ~1970! Price and output response of marketed surplus of foodgrains: A cross sectional
study of some North Indian villages+ American Journal of Agricultural Economics, 52, 51– 61+
Behrman, J+R+ ~1966! Price elasticity of the marketed surplus of a subsistence crop+ Journal of Farm
Economics, 48, 875–893+
Behrman, J+R+ ~1968!+ Supply response in underdeveloped agriculture: A case study of four major
annual crops in Thailand, 1937–1963+ Amsterdam: North-Holland Publishing Company+
Chambers, R+G+ ~1988!+ Applied production analysis+ New York: Cambridge University Press+
De Janvry, A+, & Kumar, P+ ~1981! The transmission of cost inflation in agriculture with subsistence
production: A case study in North India+ Indian Journal of Agricultural Economics, 36, 1–15+
Government of Haryana+ ~2000–2001!+ Statistical Abstract of Haryana+ Economic & Statistical Orga-
nization, Planning Department, Chandigarh, Haryana, India+
Government of India+ ~2001!+ Agricultural Statistics at a Glance+ Directorate of Economics & Sta-
tistics, Ministry of Agriculture, New Delhi, India+
268 GOYAL AND BERG

Haessel, W+ ~1975! The price and income elasticities of home consumption and marketed surplus of
food grains+ American Journal of Agricultural Economics, 57, 111–115+
Judge, G+, Hill, R+, Griffiths, W+, Lutkepohl, H+, & Lee, T+ ~1988!+ Introduction to the theory and
practice of econometrics ~2nd ed+!+ New York: Wiley+
Krishna, R+ ~1965!+ The marketable surplus function for a subsistence crop: An analysis with Indian
data+ The Economic Weekly, 17, 309–324+
Kumar, P+, & Mruthyunjaya ~1989!+ Price policy and marketed surplus of paddy and wheat in India+
Indian Journal of Agricultural Economics, 44, 430– 435+
Lau, L+J+ ~1976!+ A characterization of the normalized restricted profit function+ Journal of Eco-
nomic Theory, 12, 131–163+
Lau, L+J+ ~1978!+ Application of profit function+ In M+ Fuss & Daniel McFadden ~Eds+!, Production
economics: A dual approach to theory and applications ~pp+ 133–215!+ Amsterdam: North Holland+
Reddy, G+P+, Chengappa, P+G+, & Achoth, L+ ~1995!+ Marketed surplus response of millets: Some
policy implications+ Indian Journal of Agricultural Economics, 50, 668– 674+
Shah, S+L+, & Pandey, V+K+ ~1976!+ Study of marketed surplus of wheat in critical areas of India+
G+B+ Pant University of Agriculture and Technology, Pantnagar, Nainital, India+
Shephard, R+W+ ~1953!+ Cost and production functions+ Princeton: Princeton University Press+
Zellner, A+ ~1962!+ An efficient method of estimating seemingly unrelated regressions and tests for
aggregation bias+ Journal of the American Statistical Association, 57, 348–376+

S.K. Goyal is Associate Professor of Agricultural Economics at the CCS Haryana Agricultural
University, Hisar, India. He received his Ph.D. degree in Agricultural Economics from the same
university. He has 11 years of experience teaching Agricultural Economics and Agribusiness courses.
He is the recipient of the Alexander von Humboldt Research Fellowship and worked at the Uni-
versity of Bonn, Germany, during 2001–2002 under this fellowship. He has published over 30 papers
in academic journals and periodicals. Dr. Goyal has also published a book. His current area of
research is price analysis and production economics.
Ernst Berg is a Professor for Environmental & Production Economics at the Department of Farm
Management, University of Bonn, Germany. He has also served as Professor at the University of
Hannover (1985–1989) and the Technical University of Munich, Germany (1989–1993). He was
Dean, Faculty of Agriculture, University of Bonn, Germany, during 1998–2000. He received a diploma
degree (Agricultural Economics) in 1972 and a Doctorate (Ph.D.) degree in 1976 from the Univer-
sity of Bonn. Prof. Berg has been a research fellow at Michigan State University, during 1980–
1981. He has published many research papers in academic journals and periodicals. His current
research interest includes system analysis and system theory, production economics, and environ-
mental economics.