Terms of trade go against farmers in FY22 after a gap of two years

Simply put, farmers are paying a higher price for their agri inputs and for services such as health and education, as compared to the price they receive on the sale of their produce

Though the farm sector is projected to grow at a robust 3.9 per cent in FY22 as per the first advance estimates of national income, it is of little consequence to Indian farmers. This is because the terms of trade in agriculture have started going against them again, after a gap of two years, due to higher inflation in the non-agriculture part of the economy.

The phrase 'terms of trade' for agriculture in layman’s language broadly refers to the gap between the price paid for inputs used in growing agricultural crops, and the prices received from the sale of those crops.

According to the National Income estimate, the deflator in agriculture Gross Value Added (GVA) is projected to grow by 5.2 per cent in FY22, while that in non-agriculture GVA, which largely consists of industry and services, is projected to grow at almost twice the rate, at 10 per cent.

The deflator measures the rate of change in prices or the inflation rate.

This broadly means that in the current financial year, Indian farmers are paying a higher price for their inputs and other consumption items such as health and education of their wards, as compared to the price they receive on the sale of farm produce.

An unfavorable  term of trade also has a bearing on the broader income of a farming household.

In FY21, the deflator in agriculture grew by 3 per cent, while that in the non- agriculture sector grew by 2.8 per cent. Similarly, in FY20, the deflator in agriculture grew by 8.2 per cent while that in non-agriculture GVA grew by 2.4 per cent. (see chart)

Though the deflator has been calculated in accordance with the first advance estimate and is subject to revision when further updated data sets are released, experts said there is very little chance of a big change in terms of trade this year as the wholesale price index (WPI) has been ruling high.

“An unfavourable terms of trade in agriculture which has happened in FY22 after a gap of two years basically shows that farmers are paying higher price for their inputs which includes diesel, fertilisers and also for consumption services such as health and education in comparison to the price that they receive by selling their produce,” Dr S Mahendra Dev, Director and Vice Chancellor of Mumbai-based Indira Gandhi Institute of Development Research (IGIDR) told Business Standard.

He said terms of trade have also reversed as core inflation (non-food and non-fuel) has risen at a faster rate as compared to the food inflation.

“Though the production of foodgrains, horticulture, milk and other items is at record highs in FY22 and their prices are also good, it may not have helped farmers much, as the prices of items that they consume either as inputs or as services have grown at a faster rate,” Dev said.

He said a worsening terms of trade for agriculture coupled with low rural wages does not augur well for the larger rural economy as such and could delay the rural recovery.

Recovery in rural areas has been a matter of concern despite faster economic growth as highlighted by several indicators.

According to a Business Standard report filed in October 2021, in the first seven months of FY22, rural consumer demand has stagnated. Click here to read the report. 

Rural sales of fast-moving consumer goods (FMCG) had grown below 5 per cent in August and September 2021 while till then two-wheeler sales were far off from their 2019 levels, television sales had fallen in smaller towns, farm credit had grown only 19 per cent over two and a half years, and there was an excess supply of labour as shown by the robust MGNREGA work demand in FY22.

In fact, demand from households for MGNREGA work has been robust for the second year running in FY22 till December.

Though less than FY21, on average, more than 20 million households have been demanding work under the scheme, from April to December of FY22.

This some experts say shows that rural recovery has not yet come back to pre-Covid levels.

Production highs and growth

The first advance estimates also showed that at constant prices agriculture and allied activities are estimated to grow at 3.9 per cent in FY22, up from 3.6 per cent in the previous fiscal year.

At current prices, growth is estimated to be 9.1 per cent in FY22, up from 6.6 per cent during the same period last year.

The real GVA in agriculture and allied activities in FY22 is slightly higher than the long-term average for the sector which is 3-4 per cent and also greater than most economists’ expectations.

The first advance estimates of National Income is based on the first advance estimate of crop production which primarily comprises the kharif harvest and an indicator of higher growth in the full year could also mean that the government expects the coming rabi harvest to be good as well.

According to the Centre’s first advance estimate of agriculture production released in September 2021 for the 2021-22 season (July-June), India's foodgrain production is likely to touch a record 150.50 million tonnes in the kharif season. 

Oilseeds production was estimated to be 23.39 million tonnes, 2.66 per cent less than last year's, but pulses situation was relatively better as production of kharif pulses was expected to be at 9.45 million tonnes which was 8.74 per cent more than the previous  year's.

However, experts said that much should not be read into the initial production estimates of pulses and oilseeds as final harvest might go down in the subsequent estimates when the crop starts hitting the market in full steam.

In the rabi season, latest data showed that rabi crops have been planted in around 65.21 million hectares till January seven, which is 0.59 million hectares more than the previous year's. The maximum increase in area has been in mustard which is almost 1.7 million hectares more than the previous year's.

Mustard production in the coming rabi season is expected to be around 10-11 million tonnes, up from 8.5 million tonnes in the previous year.

Trade sources said that higher acreage is reported from all the major growing states of Madhya Pradesh, Rajasthan and UP due to  a sharp jump in retail prices.