Controls and the Intersectoral Terms of Trade: The Indian Case

Abstract

sectors.' The Indian economy is substantially insulated from outside market forces, and the direction of movement of the intersectoral terms of trade has therefore been regarded as having special policy importance. Industry is equated with the urban, modern sector; agriculture with the rural, traditional sector. While the debate on the North-South terms of trade following Singer (I 950) and Prebisch (i 964) has prompted discussion of international trade arrangements between developing and developed economies, the debate on the intersectoral trade seems to have played a comparable role in India.2 If growth, as with SingerPrebisch, causes a deterioration in the terms of trade of the traditional sector, then policy measures to offset the associated redistributive effects are seen in India as justified. These can take the form of subsidies to agriculture, maintenance of the current tax-free status of agriculture, and other measures. Equally, since extensive redistribution through tax transfer schemes is administratively infeasible, an improvement in the agricultural-industrial terms of trade in favour of agriculture is often seen as a substitute for other redistributive measures. Poverty is concentrated in rural areas, and manipulating the terms of trade in favour of agriculture through price controls, subsidies and the like is a widely supported policy stance. In this paper we argue that existing statistical studies of the intersectoral terms of trade in India are misleading, since they typically focus on the terms of trade at controlled prices. Price and other controls in India are so extensive that black market rather than controlled prices should clearly enter any assessment of changes in the intersectoral terms of trade. We also argue that the problem with these studies is analytically deeper than simply whether black market or controlled Drices should be used. Because of