Altering price ratio in favour of farming vis-a-vis manufacturing

Experts say higher inflation in agri products not the right way to incentivise farming

High food prices might be hurting us all, but it has also aided in shifting the relative price ratio in favour of agriculture as compared
to more lucrative manufacturing over the last few years.

At the outset, it may seem that agriculture is turning out to be a better option to invest than manufacturing, but change in price ratio
does not necessarily mean that the farm sector has started giving better returns than manufacturing.

As GDP data for the last few years show, inflation has been more in agriculture and allied activities than it is in manufactured products.
The inflation in agriculture has come both from general rise in prices of farm commodities, and also from increase in the minimum support
price (MSP).

“Globally agriculture prices have risen faster as compared to non-agri prices, but it always does not mean that farmers have got better prices
for their produce in all commodities, at least in India,” said Ashok Gulati, chairman of Commission for Agriculture Costs and Prices (CACP).

He, however, agreed that the general analysis of GDP agriculture at current prices and that of manufacturing does show that ratio of
agriculture prices has been more as compared to prices in the manufacturing sector.

In the first quarter of 2010-11, prices for agriculture produce grew by 13.7 percentage points, while that of manufacturing grew by 7.6
percentage points.

For the first quarter of 2011-12, prices in agriculture rose by 12.8 percentage points while that in manufacturing by 8 percentage points.
In the first quarter of 2012-13, the price growth in agriculture was 11.3% and that of manufacturing 5.1.

Earlier, prices in manufacturing grew at a rate faster than farming, which for example can be seen from the chart, depicting movement of
prices in first quarters.

“Yes, prices have increased at a faster rate in agriculture than in manufactured products in recent times mainly due to general inflation
in food items and through government channels,” said Madan Sabnavis, chief economist with CARE Rating.

He said in the last 10 years the focus has been more on using price as an incentive for agriculture, which not necessarily might be the right
approach.

“I believe that the focus should be more on improving agriculture through qualitative change in inputs be it seeds, fertilizers and
machinery, not just through prices,” Sabnavis said.

A big jump of this price transfer in farm and allied sector activities might have come from livestock and horticulture.

In the 1990-91, the share of livestock’s value of output in total output of agriculture and allied sector was around 30%, while
it jumped to almost 38% in 2010-2011.

Similarly, that of horticulture rose from 17% in 1990-91 to almost 25% in 2010-2011.

During the same time, overall value of agriculture rose by a staggering over 650% to Rs 10, 28,071 crore.

Gulati said to understand how much farmers might have benefitted from prices; one should look at Terms of Trade (ToT) in agriculture and get
costs of inputs as well and not on agriculture GDP alone.

Except in case of wheat and rice, where the MSP money is directly transferred to the farmers, a rise in price of farm commodities does not always mean that farmers have benefitted or are any way better off than earlier. This is so because there are large intermediaries in between farmers and end consumer, besides a rise in the relative input cost of different items during the same period, which is not factored
by GDP at current prices.

“Terms of Trade are the correct way to ascertain farmer’s benefit as it comprises of prices received by farmers as against prices paid by him.
In prices paid, items relative weight of different items like self-consumption, capital goods and fertilizer is calculated,” Gulati
said. EoM.