India’s agriculture policy dilemma

In his speech at the CII National Council, Reserve Bank of India Governor Shaktikanta Das spoke about five dynamic shifts which are underway in the Indian economy. One of the five themes in the speech was “fortunes shifting in favour of the farm sector”. The speech cites record production of food grains, fruits and vegetables, and all-time high buffer stocks as “the most vivid silver lining in the current environment”. The speech also gives a policy direction for the future.

“Shifting the terms of trade in favour of agriculture is the key to sustaining this dynamic change and generating positive supply responses in agriculture. Experience shows that in periods when terms of trade remained favourable to agriculture, the annual average growth in agricultural gross value added (GVA) exceeds 3%. Hitherto, the main instrument has been minimum support prices, but the experience has been that price incentives have been costly, inefficient and even distortive. India has now reached a stage in which surplus management has become a major challenge. We need to move now to policy strategies that ensure a sustained increase in farmers’ income alongside reasonable food prices for consumers,” Das said.

That might not always be possible.

Favourable terms of trade along with reasonable food prices

Terms of trade will be in favour of agriculture if prices of agricultural goods are rising at a faster pace than that of non-agricultural goods. This need not be consistent with reasonable food prices for consumers. The agriculture ministry has released terms of trade data up to 2018-19. This data is given for agricultural versus non-agricultural sectors and farmers versus non-farmers. When the value of the terms of trade index is less than 100, it means that the relative prices are against farmers. The data shows that both these indices were rising in the last decade and have stagnated or fallen since.

The farmer versus non farmer terms of trade in 2018-19 was 96.4, while the agriculture versus non-agriculture index was at 106.8.

The trend is worse when it comes to the farmers versus non-farmers index. This is also the period when food price inflation growth has moderated. Food inflation shared the upward trajectory of terms of trade for agriculture when the latter was rising. This suggests that maintaining terms of trade in favour of agriculture and ensuring reasonable food prices for consumers might not be compatible.