Term of Trade | 08 Jan 2024

Over the last decade and a half, Terms of Trade (ToT) for Indian agriculture has shown significant improvement based on national income statistics.

• The ToT improvement in agriculture is attributed to the global agri-commodity price boom and policy interventions, especially minimum support price (MSP) hikes.
• ToT for Indian agriculture refers to the movement in prices of farm commodities relative to non-farm goods and services.
  • Terms of trade refers to the ratio of agricultural prices to industrial prices, measured as price indices.
• A rise in the terms of trade implies better purchasing power for the agricultural sector in terms of industrial goods.
  • A ratio above one (or 100%) implies favorable pricing power, in terms of what farmers sell versus what they buy.
  • A TOT ratio below one indicates unfavorable conditions of exchange.
• The increase in procurement prices has led to a rise in food subsidy bills, contributing to fiscal deficit and macroeconomic management issues.