COMMODITY PRICE INSTABILITY UNDER GLOBALISATION: A study of India’s plantation crops

Abstract

India’s plantation sector is currently operating in an entirely different scenario from the earlier one of protection and market intervention by the commodity boards. In the pre-reform period, mainly the domestic forces of supply and demand guided domestic prices of the crops since the sector was insulated from external competition and operating in a regulated marketing system by the commodity boards. With the opening up of the economy and commodity market liberalization, domestic markets are increasingly getting integrated with the global market, wherein instability in domestic price is driven mainly by the global supply and demand forces. In this context, the paper attempts to explore the dynamics of domestic price instability of five major plantation crops: Coffee, Tea, Natural Rubber, Black Pepper and Small Cardamom, specifically looking at its two dimensions - inter-year and intra-year. The study has found that while inter-year instability has been explained mainly by the multi-year cyclicality arising in response to the cycles in production, intra-year instability has been explained mainly by the seasonality of production with wide inter crop variations. The crops for which domestic market is highly integrated with the global market (Natural Rubber, Black Pepper and Coffee) are found to be showing greater price instability in the open trade regime as compared to the closed regime. The crops, which are highly domestic market oriented (Small Cardamom and Tea), are showing a decline in instability in the open trade regime as compared to the closed regime. Hence, increased international integration of commodity markets for Natural Rubber, Coffee and Black Pepper is found to have resulted in an increase in price instability. On the other hand, greater domestic market orientation of Small Cardamom and Tea appears to have helped reducing their price instability in the open trade regime as compared to the closed regime.