GS Paper III

News Excerpt:

The Terms of trade (ToT) for Indian agriculture, comparing farm commodity prices to non-farm goods and services, have significantly improved over the last 15 years.

More details on the news:

• The rise in agricultural growth rates, averaging 3.7% annually from 2005-06 to 2021-22, is attributed to the improved ToT.
•  The global agri-commodity price boom and government policy interventions, particularly minimum support price (MSP) hikes, played crucial roles.
•  From 1973-74 to the mid-2000s, the ToT for agriculture remained subdued, but a substantial recovery started in 2009-10, peaking at 130.2 in 2020-21. Despite the overall improvement in the ToT, the benefits have been more pronounced for agricultural laborers than farmers.
•  The Terms of Trade (ToT) ratio for farmers increased significantly by 17.3% between 2004-05 and 2010-11 but has since stagnated at 97-99 levels. Agricultural laborers experienced a more substantial increase in ToT ratio (109.2%) from 2004-05 to 2016-17, but it declined to 119.5 in 2021-22.
• Economic growth and alternative employment opportunities outside agriculture have led to increased real wages for agricultural laborers, impacting farmers who face rising production costs without a proportional increase in crop prices.

What is the Terms of Trade?

• Terms of Trade (ToT) refer to the ratio of prices received for a country's exports (in this context, agricultural goods) to the prices paid for its imports (non-agricultural goods and services).
•  An improvement in ToT indicates a favorable exchange for a sector, while a decline suggests unfavorable conditions in terms of selling versus buying prices.

How is Terms of trade (ToT) calculated?

• Terms of Trade (ToT) are calculated by comparing the prices of farm commodities to the prices of non-farm goods and services.
• The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100. Using implicit price deflators, the ratio of Gross Value Added (GVA) in agriculture to non-agriculture determines the ToT.
• A higher ToT indicates favorable conditions for the farm sector, while a lower ratio suggests unfavorable exchange conditions.

Pros of relative changes in Terms of Trade:

•  Stable and favorable terms of trade can provide income security to farmers by ensuring stable prices for their agricultural produce.
•  Relative changes in terms of trade, if structured to benefit farmers during bumper crops, can provide incentives for adopting new technologies and innovative farming practices.
•  Changes in terms of trade can influence cropping patterns and encourage shifts in technology, leading to a redistribution of resources and income in the agricultural sector.
•   Improving terms of trade in agriculture, through interventions like price support, can contribute to food security by maintaining a steady supply of agricultural products.
•  Well-managed terms of trade policies can contribute to rural development by creating cooperative markets and providing a level playing field for farmers against powerful market forces.

Cons of relative changes in Terms of Trade:

• Stabilizing agricultural prices may destabilize the income of farmers, especially if they cannot take advantage of higher prices during partial crop failures.
•  Rising agricultural prices may lead to "price-price inflation," causing difficulties for non-agriculturists and consumers.
•  Fixed prices may result in market distortions, as all agricultural surpluses may not be efficiently cleared.
• Higher agricultural prices may harm small and marginal farmers who are "net buyers," buying at higher prices after selling at lower prices.
• The focus on price interventions may lead to a neglect of technical support to agriculture, hindering long-term productivity and sustainability.

Conclusion:

The Terms of Trade (ToT) for Indian agriculture have significantly improved in the last 15 years, driven by agricultural growth, global price booms, and government policies. While benefiting laborers more than farmers, ToT stability is crucial for income security, technology adoption, and rural development.