Liberalized trade and domestic price stability. The case of rice and wheat in India

This paper analyzes the effects of liberalizing foodgrain trade on domestic price stability using a multi-market equilibrium model in which the direction of trade is determined endogenously and world prices are sensitive to the amount traded by India. Simulation results demonstrate that contrary to popular belief, freeing of trade by India leads to greater domestic price stability even though world prices are more volatile. Freeing of trade by India also leads to higher world price stability. Under liberalized trade, variable levies/subsidies are more effective in stabilizing domestic prices compared to buffer stocks. It is therefore in India's interest to argue for non-zero binding on import tariffs and export subsidies at the WTO negotiations.