Dynamic Demand Analysis of India's Domestic Coffee Market


Coffee, although an important commodity in India's agricultural exports, has faced fluctuating international prices and decreasing unit value realisation, especially in the post-reform period. Hence, domestic market for coffee cannot be neglected altogether. In fact, Coffee Board has proposed a promotional campaign to increase domestic demand for coffee. In this context, it becomes necessary to understand weather the emphasis should be on price incentives or nonprice factors. We estimate coffee demand for the Indian domestic market using the dynamic error-correction methodology (ECM). Results show that while demand for coffee is inelastic in the long-run, it is highly inelastic in the short-run. This suggests that Coffee Board may focus efforts on non-price factors rather than price incentives in their generic coffee promotional campaign.


Dynamic Demand Analysis of India’s Domestic Coffee Market


Introduction Coffee, cultivated predominantly in the states of Karnataka, Tamil Nadu and Kerala, is

an important plantation crop in India with an annual production of about 2.28 lakh tonnes. Although coffee is considered as an export-market crop, its performance has not been encouraging in the post 1991 economic liberalisation period. Datta, Chakrabarti and Gandhi (1999) show that the relative unit value realisation and the share of coffee exports in India's total agricultural exports has decreased in the post-reform period. Despite being the traditional exporter of coffee, India does not rank even among top 11 exporting countries to Germany, where India exports maximum amount of its coffee. Further, a report by World Trade Organisation (WTO, 1997) indicates that in the post-WTO regime, coffee prices have fluctuated widely from year to year. In 1995, the spot export price of coffee increased by 2 per cent, then dropped by 25 per cent the very next year, and increased once again by...