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18th December 2023 (9 Topics)

How terms of trade have moved for agriculture

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.

About

  • ToT signifies the movement in prices of farm commodities relative to non-farm goods.

Terms of Trade (ToT):

  • Ratio of average prices of a country's exports to imports.
  • Reflects the purchasing power of a country in international trade.
  • Improvement: When export prices rise relative to import prices.
  • Impact: FavorableToT can enhance economic well-being, while unfavorableToT may pose challenges for a nation's economy.
  • Calculation: ToT = (Export Price Index / Import Price Index) × 100.
  • Calculated using implicit price deflators, it assesses inflation relative to a base year.

What are Deflators?

Deflators are economic indicators used to adjust nominal values, such as GDP or GVA (Gross Value Added), for the effects of inflation or changes in price levels. They help convert nominal values expressed in current prices into real values expressed in constant prices, allowing for a more accurate comparison of economic performance over time.

What is Implicit Price Deflator?

  • Applied to specific components, such as GVA in agriculture, industry, or services.
  • Helps gauge inflation or deflation in individual sectors.
  • Chand and Singh's study reveals a significant improvement in ToT for Indian agriculture.

Decadal Shifts -

  • From 1973-74 to mid-2000s, ToT for agriculture remained low, reaching 85 levels.
  • Real recovery initiated in 2009-10, peaking at 130.2 in 2020-21.
  • A dip to 126.6 in 2022-23 is noted.

Contributing Factors -

  • Chand and Singh attribute India's agricultural growth (average of 3.7% p.a. from 2005-06 to 2021-22) to improvedToT.
  • Factors include the global agri-commodity price boom and policy interventions like MSP hikes.

Analysis of Farmer and Labourer ToT-

  • Farmer ToT saw a significant rise (17.3%) from 2004-05 to 2010-11, stagnating at 97-99 levels thereafter.
  • Agricultural labourers experienced a more spectacular rise (109.2%) till 2016-17, followed by a decline to 119.5 in 2021-22.

Political Economy Implications-

  • Accelerated non-agricultural employment growth impacted labour markets and real wages for agricultural labourers.
  • Farmers faced increased costs without commensurate rises in produce prices, impacting their ToT.
  • The stagnation in ToT for both farmers and labourers reflects the complex challenges in India's agrarian landscape.
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