ToT for Indian agriculture -How terms of trade have moved for agriculture

Source: The post ToT for Indian agriculture has been created on the article “How terms of trade have moved for agriculture” published in “Indian express” on 18th December 2023.

UPSC Syllabus Topic: GS paper 3- Indian economy- Employment & changes in industrial policy and their effects on industrial growth.

News: The article explains the changes in the Terms of Trade for Indian agriculture, highlighting the evolving price relationship between farm and non-farm goods. It also discusses the varying impacts on farmers and agricultural workers, leading to economic and social consequences.

What is the Terms of Trade (ToT)?

Terms of Trade (ToT) in simple terms refers to the ratio of the prices at which a country sells its exports to the prices at which it buys its imports. In an economic context, TOT refer to the relationship between how much money a country pays for its imports and how much it earns from exports. It is expressed as a ratio of import prices to export prices.

For agriculture, ToT compare the price farmers get for their agricultural products (like wheat, rice) against the prices of the goods and services they need to pay (like for machinery, fertilizers).

For farmers and agricultural laborers, Terms of Trade measure how much they are earning from their crops and labor, when compared against the costs of essential items like food and tools.

This metric reflects whether they are making more money from their work than they spend on daily needs. Favorable Terms of Trade occur when these earnings surpass their expenses.

What is the significance of ToT?

Economic Indicator: ToT shows a country’s economic strength. Better ToT means earning more from exports than spending on imports, leading to a stronger economy.

Living Standards: For individuals, especially in sectors like agriculture, favorable ToT can mean higher income from their produce, which can improve their living standards. Conversely, unfavorable ToT can lead to reduced income and lower standards of living.

Income Distribution: In the agricultural context, ToT affects income distribution within the economy. If farmers are getting better prices for their products, it can lead to a more equitable distribution of income, benefiting rural communities.

How does ToT affect farmers and farm workers?

Overall Trend: While there has been an improvement in ToT for the farm sector, the gains have been more pronounced for agricultural laborers than for farmers. The last few years have seen a stagnation or decline for both groups.

What are the social and economic implications of ToT?

Impact on Marginalized Communities: The rise in ToT benefited agricultural laborers, primarily from Dalit, Adivasi, and Most Backward Classes, historically at the socioeconomic bottom.

Economic Growth and Labor Opportunities: Growth in the wider economy around 2003-04 opened up non-agricultural jobs, particularly in construction and urban services, impacting labor availability in agriculture.

Tightening of labor markets: Initiatives like the Mahatma Gandhi National Rural Employment Guarantee Act and public distribution systems contributed to the tightening of labor markets and improvement in laborers’ wages and ToT.

Challenges for Farmers: Farmers have been under financial pressure due to rising labor and input costs. Despite government support through subsidies and MSP, their Terms of Trade (ToT) have not shown significant improvement, remaining largely stagnant. This increased demands from agrarian communities like Marathas, Jats, and Patidars for government job reservations and educational benefits.

Question for practice:

Examine the political economy implications of the changing Terms of Trade (ToT) for Indian agriculture,