On Kisan Diwas: Why terms of trade have improved more for farm workers than farmers

Have agricultural labourers fared better than farmers in India during the last two decades? Data on terms of trade (ToT), or the ratio of prices received to those paid, seems to suggest so.

The Agriculture Ministry compiles indexes of the prices received (IPR) by farmers for the produce they sell as well as the prices paid (IPP) for the products bought by them.

The latter include final consumption items (from purchased foods such as sugar, salt, edible oil, biscuit, bread and tea, to clothing, soap, toothpaste, medicines, health and education, mobile services, two-wheelers and gold jewelry), intermediate inputs (seed, fertiliser, crop protection chemicals, hired labour, diesel, irrigation charges, livestock feed and interest on loans) and capital goods (tractors, farm equipment, electric motor/diesel pumps, cement, bricks, steel and other construction material).

The IPRs and IPPs have been constructed by taking the triennium ended 2011-12 (2009-10, 2010-11 and 2011-12) as the base period or reference point, against which prices are compared over time.

Farmers’ terms of trade

Table 1 shows crop prices realised by farmers, reflected in their IPR, rising by 111.2%, from 62.4 to 131.7, between 2004-05 and 2013-14. During this period, the prices of products purchased by them (i.e. IPP) went up by just 88.2%, from 71 to 133.6.

farmers Express Graphic: Ritesh Kumar

As a result, the ToT for farmers – the ratio of IPR to IPP – increased from 87.8% to 98.6% over these nine years. It is a different thing that the ToT ratio was above 1 (100%) only in 2009-10 and 2010-11. Those were the years when farmers enjoyed favourable pricing power, as the prices received for their produce (relative to the base period) caught up with that of the basket of goods bought by them.

During the subsequent nine-year period, the IPR for farmers has gone up by just 56.3% (from 131.7 to 205.8) and below the 58.4% increase in their IPP (from 133.6 to 211.7). With the costs rising more than prices received at the farm gate, the ToT has stayed below 1 and fallen from 98.6% to 97.2% between 2013-14 and 2022-23.

A more detailed break-up of costs (not shown in the table) reveals the IPP for intermediate inputs registering the highest jump between 2004-05 and 2022-23, at 274.6%. This is as against the 198.1% for the overall combined IPP. The IPP for final consumption items and capital formation goods have gone up even less, by 165.1% and 119.7% respectively, over these 18 years.

Simply put, the cost squeeze for farmers is coming mainly from the inputs – be it labour, fuel or pesticides – that go into the production of crops. And they aren’t able to pass these on fully in the form of higher prices.

Agricultural labourers’ terms of trade

The IPR for agricultural labourers is basically the wages received by them. The IPP in their case is only for final consumption items: Agricultural workers, unlike farmers, have only their labour power to sell, with the income from that mostly spent on consumption goods.

From Table 2, it can be seen that the IPR for agricultural labourers more than trebled, from 49.1 to 151.4, between 2004-05 and 2013-14, while their IPP climbed hardly 1.7 times (from 76.4 to 129.3) during this period. The growth in wages surpassing consumer product inflation, thus, translated into improved ToT. The improvement was quite spectacular – from extremely unfavourable (64.2%) to rather favourable (117.1%) conditions of exchange.

The ToT ratio for agricultural labourers, moreover, continued to rise even after 2013-14, peaking at 134.4% in 2016-17 and persisting at 130%-plus right till 2018-19. It has, however, dropped thereafter to 111.7%, which is also consistent with the more recent trend of stagnant, if not declining, rural wages growth in real inflation-adjusted terms.

The ratio of IPR to IPP has, nevertheless, remained above 1 (100%) for agricultural labourers since 2010-11. The overall improvement recorded, from 64.2% in 2004-04 to 111.7% in 2022-23, has also been more than that for farmers (87.8% to 97.2%).

Political economy impact

Agricultural labourers have traditionally occupied the bottom-most rung of India’s socioeconomic ladder and are largely from Dalit, Adivasi and Most Backward Class backgrounds.

Accelerated economic growth from the early 2000s helped create new employment avenues for them outside of agriculture – in construction, urban informal services, and manufacturing. That, along with government interventions such as the Mahatma Gandhi National Rural Employment Guarantee Act and a more effective targeted public distribution system, led to a tightening of rural labour markets. Farm workers, then, discovered a hitherto non-existent “opportunity cost” or alternatives to transplanting paddy, harvesting sugarcane, spraying insecticides and manual weeding.

The last few years have also seen new welfare programmes, especially cash transfers targeting women. Some 14 states now have income support schemes (offering Rs 1,000-2,000 per month). Neelkanth Mishra, Chief Economist at Axis Bank, estimates these to cover a fifth of India’s adult female population and their total annual budgetary outgo at Rs 2 lakh crore. Such schemes have further crimped the supply of agricultural labourers. Farmers complain that even the ones available demand more, or work fewer hours for the same wage.

Farmers experienced rising ToT from the mid-2000s till about 2013-14, which coincided with a boom in global agri-commodity prices. The Food and Agriculture Organization’s world food price index (base value: 2014-2016=100) soared from 58.1 to 120.1 between 2003 and 2013. Since then, they have been squeezed between higher costs and no commensurate increase in produce prices.

Subsidies on fertilisers, electricity, canal water, agricultural credit and crop insurance have partly insulated farmers from rising production costs, just as minimum support price procurement has enabled stable realisations in some crops like paddy, wheat and sugarcane.

But despite these, the farmers’ ToT has stagnated at best, made worse by fragmentation of landholdings, not many new crop yield breakthroughs and growing climate-related uncertainties. It also explains the restiveness among Jats, Marathas, Patidars, Kapus and other agrarian communities – and the clamour for reservation in government jobs and educational institutions, besides a general desire to exit farming, by them.

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