Exchange Rate Misalignment and Its Effects on Agricultural Producer Support Estimates (PSEs) in India

This paper examines the effects of the exchange rate misalignment on the agricultural Producer Support Estimates (PSEs) in India. Based on various time series techniques, the equilibrium exchange rate of the Indian rupee and the corresponding misalignment are estimated and applied to the calculations of the PSEs. Our results show that the indirect effect from exchange rate misalignment on India's agriculture has either amplified or counteracted the direct effect from sectoral-specific policies. The indirect effect of exchange rate overvaluation has potentially taxed the agricultural sector in India during the periods leading up to the financial crisis. However, the magnitude of these indirect effects becomes smaller in the later periods when the actual exchange rate moves closer to its equilibrium value