High food prices might be hurting us all, but it has also aided in shifting the relative price ratio in favour of agriculture, compared with the more lucrative manufacturing over the last few years.
At the outset, it might seem agriculture is turning out to be a better option to invest in than manufacturing. But a change in price ratio does not necessarily mean the farm sector has started giving better returns than manufacturing.
As gross domestic product data for the last few years show, inflation has been more in agriculture and allied activities than in manufactured products. The inflation in agriculture has come both from a general rise in prices of farm commodities, and from an increase in the minimum support price (MSP).
“Globally, agriculture prices have risen faster compared with non-agri prices, but it does not always mean farmers have got better prices for their produce in all commodities, at least in India,” said Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices.
He agreed the general analysis of agricultural GDP at current prices and that of manufacturing does show that the ratio of agriculture prices has been more against prices in the manufacturing sector.
In the first quarter of 2010-11, prices for agriculture produce grew 13.7 percentage points, while that of manufacturing grew 7.6 percentage points. For the first quarter of FY12, prices in agriculture rose 12.8 percentage points, while that in manufacturing increased eight percentage points. In the first quarter of FY13, the price growth in agriculture was 11.3 per cent and that of manufacturing 5.1 per cent.
Earlier, prices in manufacturing grew at a rate faster than farming.
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“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 that in the last 10 years, the focus has been more on using price as an incentive for agriculture, which might not be the right approach.
“I believe the focus should be more on improving agriculture through qualitative change in inputs — be it seeds, fertilisers 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 per cent, while it jumped to almost 38 per cent in 2010-2011. Similarly, that of horticulture rose from 17 per cent in 1990-91 to almost 25 per cent in 2010-2011. During the same time, overall value of agriculture rose by a staggering over 650 per cent to Rs 10,28,071 crore.
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, Gulati said.
Except in case of wheat and rice, where the MSP money is directly transferred to 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 a farmer’s benefit as it comprises 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 fertiliser is calculated,” Gulati said.