This analysis is based on an article from the Hindustan Times published in January 2023. The data in this article was used to add factual support for an application of my understanding of how a market impacted by international trade can be regulated by a government. The article is linked here.
The Indian Apple Industry centered in Himachal Pradesh suffers from the combination of high costs of production and a low free-trade price on imported apples. Producers seek out government intervention, imploring the government to implement trade protection. Government intervention is any government policy or action with the objective of changing the free market equilibrium.
The Indian Apple Market rested at Equilibrium at point E(o) with quantity Q(o) and price P(o). Once India entered a free-trade agreement with Iran and other apple exporters, they accepted the world price P(w), which was considerably lower than the original P(o). As a part of this FTA, the Indian government implemented a standard import tariff defined for regular goods. At this new international trade price, the quantity of apples supplied was Q3, of which domestic producers supplied Q4. After the COVID-19 pandemic, the cost of raw materials increased, shifting the supply curve leftward from S1 to S2. This shift in supply reduced the quantity of apples supplied by local producers to Q5, reducing the producer surplus. The demand continued to be met by the world market, especially by Iran which could produce apples at much lower costs, increasing India’s import expenditure and disrupting the balance of payments. Therefore, the current government intervention was no longer sufficient, as producers were losing out significantly to the international market.
In order to correct this, the Samyukt Kisan Morcha, a group representing the farmers, demands that the government intervenes further in the market and classifies apples as a special commodity, allowing for the government to place a 100% tariff on imported apples and increase the price of every apple to a minimum of 20 rupees.
The Apple Market currently rests at the price P(w)+50% Tariff, where the domestic suppliers supply Q1 and the rest of the demand for apples until Q2 is met by imports. The SKM proposes that the Indian government intervenes by increasing the tariff to 100%, and the price to 20 INR. Increasing the tariffs would consider the increases in the cost of production due to COVID-19, and therefore make supplying apples more profitable for farmers. This would increase the domestic quantity supplied to Q3, but the overall quantity supplied in the economy goes down to Q4. As a result, the market experiences an increase in producer surplus, a decrease in consumer surplus, an increase in government revenue, a decrease in import expenditure and an increase in deadweight loss.
The first priority of this proposal for government intervention is the producers and ensuring that their losses are averted. Producers could meet their break-even price with the increase in tariffs. The increase in producer surplus increasing as shown in the diagram and the table with areas indicates that the producers are gaining from this implementation, making the proposal successful in its aim.
India should also prioritize the balance of payments to reduce its trade deficit. The increase in tariffs would ensure that India imports fewer apples, decreasing import expenditure. The decrease in the trade deficit would also allow for the floating exchange rate of the Indian Rupee to stabilise, further encouraging investments in the economy. This would contribute to economic growth.
The consumers lose out the most, as the consumer surplus decreases significantly as shown in the table above. This reduction also leads to a larger Deadweight Loss, which harms the allocative efficiency within the country and internationally. Disrupting the allocative efficiency results in a waste of resources by artificially inflating the supply for apples.
The government revenue increase would allow the government to intervene further in the economy and subsidize the packaging, fertilizer and other products connected to the apple production process which would ensure that the supply of apples can return to normal. However, this combination of tariffs and subsidies is likely to lead to retaliatory tariffs, a risk the government must evaluate.
The likelihood of retaliatory tariffs is high because Iran and India are part of a free trade agreement. Changing the terms of this agreement would lead to Iranian producers losing out significantly on revenue, as the Indian Apple Market is one of Iran’s key export markets since the increase in fruit consumption in recent years. The compromise of this preferential trade agreement could also compromise political relations with Iran, which is a significant danger that this proposed solution poses.
Overall, the increase in tariffs would positively affect the economy as it would increase the producer welfare, and government revenue, ensuring the apple market in India can be returned to its usual equilibrium.