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Focus: GS-III Agriculture, Indian Economy

Why in news?

Reserve Bank of India Governor spoke about five dynamic shifts which are underway in the Indian economy in which one of the five themes in the speech was “fortunes shifting in favour of the farm sector” giving a policy direction for the future.

Click Here to read more about the 5 Shifts given by RBI Governor


Even though it contributes less than 15% of the GDP, agriculture continues to provide livelihood to more than 40% of the country’s workers. This makes it critical for economic growth.

Favourable terms of trade along with reasonable food prices

  • Terms of trade will be in favour of agriculture if prices of agricultural goods are rising at a faster pace than that of non-agricultural goods which need not be consistent with reasonable food prices for consumers.
  • The data released by agriculture ministry – agricultural versus non-agricultural sectors and farmers versus non-farmers – shows that both these indices were rising in the last decade and have stagnated or fallen since.
  • This is also the period when food price inflation growth has moderated.
  • Food inflation shared the upward trajectory of terms of trade for agriculture when the latter was rising.
  • This suggests that maintaining terms of trade in favour of agriculture and ensuring reasonable food prices for consumers might not be compatible.

Doing away with price support incentives

  • The policy of government procurement at Minimum Support Prices (MSP) has been a key pillar of India’s food security.
  • Guaranteed remunerative prices have encouraged farmers to grow more rice and wheat.
  • Government’s food stocks, which are built through MSP procurement, come in handy during periods of crisis such as the current one.

Issues with MSP

  1. The policy has created problems regarding ecologically unsustainable farming practices in India’s original green revolution belt.
  2. The policy has also created a regional imbalance.

According to latest procurement data from Food Corporation of India -2018-19 for rice and 2019-20 for wheat — almost 50% of total procurement was from the states of Punjab and Haryana.

These problems notwithstanding, the share of procurement in total rice and wheat production has been increasing continuously. Any sudden withdrawal of this policy is bound to create a huge disruption and possible disincentive for production.

Surplus theory in Indian agriculture

The argument that surplus management has become a major challenge in Indian agriculture, logically speaking, implies that agricultural production needs to be brought down which may not be a desirable solution, especially when the policy objective is to double farmers’ incomes.

The anecdotal evidence of crash in prices with excess production may have 2 factors causing it:

  1. The first is the question of boosting food demand in India, which is still low, compared to international standards.
  2. The second is what is referred to as the cobweb model effect. This pertains to production decisions based on limited information leading to wild swings in prices every year. (If onion prices crash in one of the years, farmers sow lower quantities, leading to a surge in prices in the next season.)

The only way to break this is to improve dissemination of information regarding climatic conditions to farmers and make sure that the government does not create additional distortions in food markets.

The Import Export factor

  • Resorting to imports on the pretext of controlling food inflation to prevent any spike in prices is an example of this kind of behaviour.
  • Exports may provide a way out, but increasing agricultural exports may not be possible in the near future.
  • Agriculture in developed countries is heavily subsidized, which reduces export competitiveness of third world exports.

-Source: Hindustan Times

February 2024