TRADE PERFORMANCE AND TRANSMISSION OF PRICE VOLATILITY : The case of Indian pepper

Abstract

The impacts of trade liberalization policies have mainly reflected in prices and it has been argued that increased integration between the domestic markets and the world markets would result in increased volatility in domestic prices. In the context of ASEAN-India FTA, this paper analyzed the price volatility of black pepper and its transmission to domestic market and prices received by the producers. The levels of instability are found significant for most of the price series of black pepper and the volatility of international prices have increased considerably in the recent past. The cointegration analysis suggested that liberalization has improved the transmission of price signals between the domestic and the international markets and there is comovement of prices. The decomposition of the variance in producer prices proved that Export Unit Values and Import Unit Values were the major factors which explained variations in producer price of pepper. Hence, allowing imports of pepper under the ASEAN India FTA would be detrimental to the producers and will make them vulnerable to market instabilities. The uncertainty in prices as a consequence of increased instability will make the farming community apprehensive and may result in farmers moving away from pepper cultivation. The paper calls for all the agencies concerned with the sector to formulate strategies to bring back the prestigious position India had in the world pepper economy. This necessitates policies not only on production technology but also on marketing and price stabilization mechanisms.