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Global price boom improved farmers’ terms of trade under UPA: Panel

As global prices rose, the ruling UPA, then, was forced to hike minimum support prices (MSP) to align them with the former.

Written by Harish Damodaran | New Delhi |
February 23, 2015 1:35:25 am

Indian farmers saw significant improvement in their terms of trade (ToT) during the last 10 years notwithstanding some reversal of late, says an agriculture ministry-appointed working group. ToT refers to the ratio of prices that farmers receive for their produce to what they pay for goods and services purchased.

The working group, headed by the director of the Indira Gandhi Institute of Development Research S Mahendra Dev, has undertaken a comprehensive exercise of constructing year-wise indices of prices received (IPR) by farmers for 79 commodities. These cover 40 agricultural crops, 29 fruits and vegetables, and 10 livestock, fishing and forest products.

The IPRs, in turn, have been compared with separate indices of prices paid (IPP) for products bought by farmers. They include final consumption items (74 of them – from rice and edible oils to toilet soaps, medicines, mobile and cable TV services, two-wheelers and gold jewellery), intermediate inputs (seed, fertiliser, pesticide, livestock feed, electricity/irrigation charges, diesel, hired labour, marketing costs and interest on loans), and capital goods (tractor, electric motor/pump, cement, bricks, steel and other construction materials).


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A ratio above one (or 100 per cent) between IPRs and IPPs implies farmers enjoying better pricing power, in terms of what they sell versus what they buy. This, over time, also leads to a shift of incomes and wealth in their favour. A ToT index ratio below one indicates unfavourable conditions of exchange.

The working group, which recently submitted its report, has found the ToT index moving clearly in favour of farmers between 2004-05 and 2010-11, reversing the decline that was noticeable from 1997-98 to 2004-05. While some may view this to signify farmers getting a good deal during the United Progressive Alliance’s (UPA) tenure, as opposed to that of its predecessor National Democratic Alliance (NDA), the reality is more complex.

harsishTo start with, the ToT index fell below one (i.e. 100 per cent) even in the last three years of the UPA regime. This was despite the index in 2013-14, at 95.55 per cent, being still higher than its level of 87.82 in 2004-05.

Besides, ToT movements are considerably influenced by global agri-commodity prices. These recorded steep falls in the aftermath of the 1997 Asian financial crisis and rebounded only with the commodity “super-cycle” boom from 2004. As global prices rose, the ruling UPA, then, was forced to hike minimum support prices (MSP) to align them with the former. The result: improved ToT for farmers. But from 2011-12, they, too, started getting squeezed, especially on account of spiralling rural wages and diesel costs. “Global prices are a significant factor affecting ToT”, Dev pointed out.

The last one year has, in fact, witnessed a renewed worldwide crash, while also making it difficult for raising MSPs. The agriculture ministry, last week, told the Supreme Court that MSPs cannot be increased to guarantee a minimum 50 per cent return over costs, as it “may distort the market”.

“ToT is only one indicator of farm incomes, which are also dependent on crop yields. Keeping on raising MSPs cannot be a solution. Increasing yields/productivity and reducing cultivation costs are needed for higher incomes today,” Dev told The Indian Express.

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