TAG: GS 3: AGRICULTURE
THE CONTEXT: Terms of trade (ToT) for Indian agriculture — movement in prices of farm commodities relative to that of non-farm goods and services — have recorded significant improvement in the last decade and a half, going by data derived from national income statistics.
UNDERSTANDING TERMS OF TRADE IN AGRICULTURE
- Defining Terms of Trade (ToT)
- Terms of Trade in agriculture represent the ratio of prices received for farm commodities against prices paid for non-agricultural goods and services.
- This ratio provides insights into the comparative pricing power of agricultural produce in relation to other sectors.
- Methodology for Calculating ToT
- Calculation of ToT involves utilizing implicit price deflators derived from Gross Value Added (GVA) data in different sectors of the economy.
- By analyzing changes in GVA at current and constant prices, the ToT ratio for the farm sector vis-à-vis non-agriculture sectors is determined.
MOVEMENT IN AGRICULTURAL TERMS OF TRADE OVER TIME
- Historical Trends
- The ToT for Indian agriculture witnessed a decline from 90.2 in 1973-74 to 72.2 by 1985-96.
- However, it notably improved in recent years, reaching 130.2 in 2020-21 before slightly easing to 126.6 in 2022-23.
- Contributing Factors
- The improvement in ToT is credited to the global agri-commodity price boom from 2004 to 2014 and policy interventions, particularly Minimum Support Price (MSP) hikes, by past governments.
IMPACT ON FARMERS AND AGRICULTURAL LABOURERS
- Effects on Farmers
- Despite the overall improvement in ToT for the agricultural sector, farmers have experienced stagnant or declining conditions.
- While the ToT ratio rose notably until 2010-11, it has stagnated around 97-99 levels, reflecting challenges in cost and pricing dynamics.
- Impact on Agricultural Labourers
- In contrast, agricultural labourers have witnessed a more significant improvement in their ToT ratio.
- It surged from 64.2 in 2004-05 to 134.4 in 2016-17 but declined to 119.5 in 2021-22.
- This increase indicates better conditions for labourers selling their services relative to their consumption expenses.
POLITICAL AND SOCIOECONOMIC IMPLICATIONS
- Impact on Socioeconomic Dynamics
- The improved ToT for agricultural labourers, often from marginalized communities, led to increased real wages, offering alternatives beyond agriculture due to rising employment opportunities in construction and urban services.
- Strain on Farmers
- Conversely, farmers faced challenges due to rising input costs, including hired labour, agro-chemicals, machinery, without corresponding increases in crop prices.
- This squeeze in profitability has led to demands for governmental support and reservations from dominant agrarian communities.
THE PRESENT SCENARIO AND CHALLENGES AHEAD
- Stagnation and Decline in Recent Years
- Recent years have seen stagnation or decline in ToT for both farmers and agricultural labourers, with minimal real wage growth for labourers and limited improvements for farmers.
- Impact on Rural Economy
- This stagnation may pose challenges for rural economies, potentially impacting livelihoods and economic growth, especially considering the reliance on agriculture in many regions.