The Effect of Export Activity on Domestic Prices: Evidence from India's Rice Sector

Abstract

How does export activity affect prices in domestic consumer markets? To explore this questions, I exploit a natural experiment provided by India's rice export restrictions during 2007-2011. I first document that the binding restrictions had a considerable negative impact on producers. However, there is little evidence to suggest that the lower prices transmitted to consumers. To estimate the causal impact of export activity on domestic consumer prices, I use a difference-in-differences framework. I show that, following the imposition of export restrictions, Indian districts with higher exposure to export trade experienced a greater increase in prices paid by consumers in local markets. To measure the intensity of exposure to trade, I use a novel strategy exploiting spatial variation in districts' proximities to export trade routes along India's road network. The estimated price effects are substantial - prices increased by an additional 5 to 6.5 percent in districts exposed to export activity. Further, the impact of export activity on prices is most pronounced for higher-quality products. I illustrate that the presence of strong complementarities between exports and intra-national trade is the main mechanism driving my results. By exploiting synergies with export activity, intra-national trade encounters lower trade costs, which are then translated to lower prices faced by consumers in domestic markets. My findings suggest that promoting export activity could be a means to reduce intra-national trade barriers for large developing economies.