In this article we will discuss about the terms of trade in Indian Agriculture! Learn about:- 1. Meanings of Terms of Trade – Types of Terms of Trade 2. Terms of Trade Indian Agriculture 3. Pros and Cons of Relative Changes.
Meanings of Terms of Trade – Types of Terms of Trade:
Terms of trade of agriculture mean the ratio of the prices paid for buying inputs for raising agricultural crops versus the prices received from selling the agricultural crops.
Terms of trade of agriculturists mean the changes in the ratio of prices paid for all things/services bought and the prices received for all commodities, goods and services sold.
Terms of trade analysis of the agriculturists should include the national income effect of higher surpluses for self-consumption.
Both types of terms of trade should incorporate the effect of grants, subsidies and remissions of rates etc. also. Then only the overall positions of gains, accrued in net terms can be understood. This is seldom done.
If the terms of trade of agriculture and agriculturists deteriorate it can lead to pauperisation of the farming community, unless the marketing margins related to costs are such that the overall incomes of the farmers increase. Interventions will be necessary for two very obvious reasons. If they are neglected there will be starvation deaths and secondly that will adversely affect the vast majority of population of the country who will not be able to buy from the secondary and territory sectors.
As we shall see the Government of India claims that on the benchmark of 1982, the terms of trade of industry were i.e., 78.6 for the industry vis-a-vis agriculturists were down by 21.4 per cent or of the agriculturists were up by 27.22 per cent. That enabled India to feed its exploding population.
(a) Price Terms of Trade or Net Barter Terms of Trade of agriculture/agriculturists/anyone will improve under the following five conditions-
The goal is not to secure improvement in terms of trade but increase in the total revenue.
(b) Gross Barter or Commodity Terms of Trade will improve if –
(i) Exports of the same quantity and quality—bring higher quantities of imports of the same quality.
(ii) Exports in lesser quantity but of the same quality—bring the same quantities of imports of the same quality.
For “exports” and “imports” we can use the term “quantities sold” and “quantities received”.
(c) Income Terms of trade are the most important terms of trade that can be measured and are to be targeted to improve, and four conditions stand out prominently-
It can be said that total revenue (outlays of buyers) can rise in both conditions… when the TT improve or when they deteriorate. In the first case demand should be very inelastic and in the second case it should be substantially elastic. Falling prices of cars, though not an agricultural product, can bring higher revenue to the producer/seller.
(a) If the terms of trade of agri-business deteriorate relatively, but more inputs are used by the farmers/agricultural sector, the revenue effect will be positive and unless the prices are down to levels below the cost of production, there is no cause of worry. In that case a reduction in supplies will ensure proper equilibrium prices.
(b) If those engaged in agro-business find that their terms of trade are falling relatively, there again there need not be panic reaction if this is leading to assured supply of inputs of high quality.
(As will be seen hereafter it is not being suggested that the “nirvana” of all activities and functions lies in deteriorating terms of trade. All that is being said is that while improvement in terms of trade will be welcome in the first instance, deterioration too need not spell doom provided the “sum- of-elasticities” favour).
(c) If seldom happens that the “terms of trade” of all manufacturing activities or agricultural crops can go up/down at the same time. Actually it is the case of the relative deterioration/improvement of one versus many others.
If the relative terms of trade of certain crops go down, there will be change in the “mix and share” through a change in the “shift and share” of the crops. Deteriorating terms of trade had been responsible for the cultivation of coarse grains giving way to superior grains.
Changing terms of trade are signals as well levers which set the lines right, just as they do i/i railway systems. Diversification in cropping pattern which includes more and higher value-productivity crops (revenue-productivity) is the consequence of the decisions of the farmers to the relative shifts in the terms of trade.
On the basis of the data published the ratio of wholesale prices based on the new benchmark year of 1993-94, the relation between the wholesale prices of food articles was 174.6 on Jan. 19, 2002 while that of manufactured products 144. Thus the index of food articles was 21.2 per cent higher than of manufactured goods (terms of trade in favour of agriculture) while that of manufacturing sector of the adverse ratio was 144-f 174.5= 0.825 i.e., 1-0.825 x 100 = -17.48 percent lower.
Not much should be read in this because there a considerable price spread in manufactured goods after retailing due to that typical Indian phenomenon of traders adding at least 15 per cent extra for “unauthorised taxes” in the name of local and other taxes extra. These are above and above profit margins and addition of taxes that are levied officially.
The price-spread of agricultural products is shared not by the farmers but by the traders. The price-spread of manufactured goods is also shared by traders but in the urban economy the trading houses are industrial houses also or vice versa; at least they have stakes in both types of activities.
Writing about “terms of trade” one should not forget a very elementary principle. Trade is the exchange of the “superfluous-surplus” (with the producer or seller) for the “necessary” (for the same person as buyer). Foodgrains with the farmers become surplus if they are over and above their consumption and seeds (for the next sowing season) requirements. Their marginal utility is zero or negative (involving storage and spoilage costs). By selling these stocks the farmers get cash for nonfood needs of which utilities/needs are high.
Thus exchange and trade maximises the use-values (utilities) for the consumers and “exchange values (prices) for the producers.
“UTILITY TERMS OF TRADE” improve for all but how much? That remains immeasurable.
FACTORAL TERMS OF TRADE also improve for both. People sell things in which their abundant factor is used intensively. In exchange they receive similar things from others for which factor endowments are not there with them.
Terms of Trade Indian Agriculture:
The terms of trade of Indian agriculture versus manufacturing could be understood with the help of the following table.
Table showing index numbers of wholesale prices of agricultural commodities relative to manufactured products 1981-82 = 100
Points worth noting are:
1. Improvement of the terms of trade of agriculture vis-a-vis manufacturing is “proved” with the Government data. The two series show that the TT of agriculture was never down vis-a-vis manufacturing. In the first 12 years listed above they were up by nearly 17 per cent and in the second series by 18 per cent.
2. Improvement of terms of trade of “agriculture” did not mean improvement of terms of trade of “agriculturists”. A good part of the price spread and marketing margins are shared by the non-agriculturist, mostly traders and intermediaries of all sorts.
3. The above figures do not take into account the malpractices of some manufacturing lines. For example- in Uttar Pradesh the sugar mills take the supply of sugarcane immediately after harvesting but make payment after a time lag of three to four or even more months.
4. The sugar mills enjoy the benefit of saving interest (infact earning it) on the delayed payment. There is innumerable irregularity like several types of commissions charged from the farmers and not to speak of the under-weighment of the deliveries of the farmers.
Leaders of the farmers say on the basis of ground realities that in reality the terms of trade of rural people and/or agriculturists generally go against the urban/manufacturing sector if we prepare the indices of the things purchased and sold by the villagers/farmers as inputs or good of final consumption.
The plight of the marginal, small and even medium farmers is even more serious.
As in international economics, ultimately all have to settle in favour of the “income terms of trade” and better still “purchasing power terms of trade”. However, one aspect of the incomes according in agricultural and non-agricultural sectors is to be acknowledged. Most of the industrial and trading houses maintain duplicate sets of accounts and even when the products are numbered (e.g., in TVs or Cars), there is considerable expenditure padding to show lesser profits.
Entrepreneurs and top persons in business establishments draw funds for their personal uses by adopting innumerable malpractices (lesser production may be shown; a good part of the production may be shown as being of “seconds” on which lower excise duty is levied etc.
Then there is that phenomenon of business and industrial houses owing land and showing incomes in crores even when land may be used for growing grass only! These things ultimately add to industrial incomes being shown what they are and thus income terms of trade of agriculture get an artificial boost on paper.
Industrial, trade and innumerable service sector establishments have a bigger percentage of their operations in the grey economy—a term now being used for the old offending term ‘black economy’. Indian economy is zebra—like and one is not sure whether a zebra has black stripes on a white body or white stripes on a black body. [Money supply (broad money) was Rs. 2700 crore only in 1969; it increased to Rs. 18,40,000 crore in October 2003.
The GDP was 681 times to money supply in 1969; and inflation was around 5.5 per cent in October 2003 and the money supply was increasing @ 18 to 20 + % per year. Obviously GDP was much higher and was in the grey segment. In December 2003, the GDP was $ 481 b, and black money was almost as much as $ 4006 billion plus all with non-agriculturists.
Whether the terms of trade of agriculture improved or not remained controversial. Tyagi, Mitra, Thamarajakshi and Nalini Vittal who tried the measure the net barter terms of trade of agriculture accused each other of being “emotional”, “verbose”, “indulging in polemics and non-conceived ideas”. They differed about all those aspects which are involved in preparing index numbers i.e., commodities to be included (traded versus non-traded), prices to be taken (farm gate, wholesale or retail or support prices), weights to be assigned etc.
There were differences about the industrial price indices also- whether that should be on the basis of the commodities that the farmers buy and sell or of all. As there were several restrictions on the free movement of many agricultural commodities, some economists took the “notional free market prices”.
It became “free for all” wrestling! There were differences about the “lean market” prices, “farm-gate” prices versus “farm house prices”; “prices received versus prices paid” and prices which different categories of farmers received in the net term.
Notwithstanding what the researchers find on the basis of the published data, the following three facts related to the relative positions of agriculturists versus others emerge thus on the basis of impromptu observational surveys:
(a) The absolute positions of people in rural areas are better but most of the villages in the non-poor states have at least 25 per cent destitute whose positions have not improved despite higher production, greater efforts to dovetail two or more modes of livelihoods, and improvement in prices.
(b) The relative income terms of trade of such persons have deteriorated vis-a-vis the better off persons rural areas, thanks to poor implementation of land reforms.
(c) The urban rich engaged in industry, trade and all types of service sectors (unless they belong to a microscopic minority of failed persons) have higher terms of trade.
The net barter terms of trade are inferior in analysis than income terms of trade; the income terms of trade are inferior in analysis to purchasing power terms of trade. The profits terms of trade of persons operating in the grey economy are higher than the highest that can be recorded anywhere.
Can we or should we shut our eyes to the billions that the shady persons from the politico-administrative system to the dons of cities, States and the country are making. There are tens of thousands of cases where the living persons have been shown as dead in the revenue records and their land transferred. Those who are in the land mafia groups will kill the harmed persons or those who try to investigate and set the things right. The terms of trade analysis becomes as irrelevant as the analysis of changes in the size and component of national income without controlling the grey economy.
Academicians put such issues under the carpet because they say that once the grey economy is to be included all estimates will become guesstimates. Some think the grey economy is of very little economic significance. However, the latter statement is the greatest understatement that can be made about the Indian economy.
It was estimated that the grey economy was of the size of 50 per cent of the non-agricultural economy of India; some opine it to be equal to the economy proper.
There were certain other problems e.g., the gur (jaggery) was assigned the weight of 4.6 while wheat was assigned the weight of 3.4 only! Rice, the staple food for more 5.1 and wrong weights can give wrong results. For example in 1960, jaggery was sold at half the price of sugar; now it is costlier. Similarly chana (black gram) was sold at half the price of wheat; now it sells at twice that price. There is need for constant adjustment in the weights, depending upon the share those particular products have in the income of the agriculturists.
Improvement in barter terms of trade agricultural cannot ensure such profitability that all those engaged in agriculture can write off their economic problems. In order that agriculture be upto the international competitive standards, conjunctive use of modern inputs (with research and development support coming from the government institutions) will be more important.
Size-neutral modern technology assumes great importance so that even the small farmers can adopt that. Technology within the reach of all is necessary because 90 per cent farmers of India who own/operate over 65 per cent of the land are marginal, small and semi-medium landowners/operators.
If a long term view of the development of agriculture is taken, then 35 per cent increases in the yield was due to technology effect. So far development of technologies in India had catered to the requirements of special crops, special regions as also for different categories of the farmers.
Pros and Cons of Relative Changes in Terms of Trade:
Agricultural prices have a tendency of short-term seasonal fluctuations and long-term relative decline, if the population becomes stable. Stablisation of agricultural prices, however, destabilises the income of the agriculturists. If procurement prices are fixed, the farmers cannot take advantage of higher prices in the case of partial crop failure. In the case of bumper crops the consumers cannot get the advantage of lower prices. At fixed prices all agricultural surpluses may not be cleared.
Falling agricultural terms of trade can impoverish the peasantry and rising prices will lead to the “price-price inflation” putting all non-agriculturists to difficulties. Prices have got to be cost plus, but not equal to the cost of the inefficient farmers. Different regions will have different costs for the same crops. If there is to be government intervention in prices, it should be for the benefit of all.
Tobacco is most certainly one agricultural product which should receive no price support so that in due course of time its cultivation can be stopped. However, this may never happen and even the “negative price support” to the cultivation of this anti-social crop may not wean this weed away.
Agricultural prices have allocative functions as also redistribute function. Differential prices of different crops and the differential profits in different crops in different years will most certainly change the cropping pattern. There will be shifts in the technologies, cropping practices and relationship between farm and off-farm activities.
Not prices alone but the proportions of the type of land held by different persons and the use-elasticity of land {changes triggered by prices) can bring some redistributive effect. However, price advantage cannot eradicate rural poverty. Small and marginal farmers do not generally have marketable surpluses; these farmers are generally “net buyers” i.e., part of the produce may be sold immediately after harvesting not because these farmers had genuine marketable surpluses but because they needed cash for non-food needs. Hence higher agricultural prices can harm the interests of these categories of farmers because they sell at lower prices and then buy at higher prices in the post harvesting season.
Terms of trade of agriculture should not be calculated on interregional basis because movement of agricultural items from one small region to another will have to be related as “exports” and “imports”. Senseless exercises will yield results not worthy of great trouble. Deflection of main issues of development of agriculture should not be there. One thing that is to be acknowledged is that agriculture may or may not yield high profits but in all cases the goods produced by it are of higher value than prices.
Neglect of agriculture can mean death; while and economy without industrial development (as the primitive economies were and in some countries still are) will give a lower level of living but not necessarily an unhappy one. This point is a point of philosophy yet important to highlight the importance of all spurs of agricultural development… technical and price spurs.
Even when terms of trade are deteriorating, the absolute incomes of all groups engaged in different activities can improve. Matrices need not mask this truth. The discussion on terms of trade need not degenerate into a purist numerical exercise; calculations for the sake of calculations. We cannot argue that the terms of trade of someone should definitely improve at the cost of others.
There were the pioneering works on “terms of trade” but the contributions of the under mentioned economists were also replete with such works about the works of other as “limited coverage”, “biased coverage”, “use of improper weights”, “adoption of incorrect methods for estimating the volume of ‘exports’, “wrong methods of price selection”, “disregarded grades”, “wrongly constructed price indices”, “blowing up the sample data of consumption” etc. There was a lot of academic mudslinging as the researchers criticized the findings of others as some were based (in case of cotton only) on pre-ginned, post-ginned or pressed cotton.
Economists argued in the early 60s to 80s that terms of agriculture improve because the agricultural products have inelastic demand and of the industrial sector deteriorate because the demand of most of its products in elastic.
Many economists wanted that terms of trade of agriculture should always be allowed to improve, through intervention policies of price support and subsidies, otherwise exploding population cannot be fed. Unfortunately in their discussion, the technical support to agriculture received a backseat.
The grand goals of policies of agricultural development should be that it should contribute more and more in absolute, real and monetary terms through less and less in percentage terms to the GDP of the country, secondly it should improve the employment intensity on land so that new additions to population need not remain dependent on upon employment on agricultural activities.
Thirdly the farmers should have higher and higher entitlements to purchase inputs from agri-industries but should also be able to increase their liabilities towards the other sectors i. e., should be able to purchase their goods and services, fourthly there be so high marketable surpluses that they meet the needs for ending acute and chronic hunger of the people as also supply the necessary raw materials to the agro-industries.
If both agri-industries are located near masses (in “rurban” areas) and run by the masses (greater labour intensity) and for the masses (not deliberately exploiting the rural people through manipulated terms of trade), then the country will have a strong rural development base.
Monetarists favour free markets prices and no subsidisation; fiscalists advocate massive government investment in public infrastructure for the rural and agricultural development and price support and subsidies when and where necessary. They want that backlog of centuries in the rural development should be cleared with public interventions.
Structuralists want all that fiscalists want plus land reforms i.e., change in the rural superstructure. Landlessness and asstlessness are two bug-bears of rural development. A good management policy of rural/agricultural development will be to convert the competitive rural agricultural markets into cooperative markets so that there can be some standing up to the oligopolistic forces of the secondary and tertiary sectors as also shall provide “level-playing” field to the rural populace.
We have seen how it is necessary that the ratios of “input prices versus output prices” (terms of trade of agriculture) and the ratios of prices paid by the agriculturists to non-agriculturists (terms of trade of agriculturists) should be protected. They should not keep down by powerful non-rural lobbies and oligopolistic/collusive market forces.
A production oriented price policy would include a short run goal of stability in prices of different crops; a medium run goal of stability in the terms of trade of agriculture would have to encourage the spread of new technology and investment in agriculture. The long run goal of the agricultural price policy would have to be for gradual adjustment of all prices towards their equilibrium level. Subsidies and support prices and tax concessions should not be permanent feature. Both management and administrative measure will be necessary for all.