Intersectoral Terms of Trade, Agricultural Growth and the Pattern of Demand

Abstract

The movement of intersectoral terms of trade in India is generally regarded as an issue of crucial importance in affecting patterns of growth and income distribution both in agriculture and in industry. While there is substantial (and often acrimonious) debate on the determinants of agriculture-industry terms of trade as well as their precise impact on economic welfare and the growth process, the significance of such movements tends to be taken for granted by all protagonists. In this paper a slightly different position is taken, in which intersectoral terms of trade are assigned a less important role in determining economic processes. Some of the arguments can be starkly presented as follows: In general the government in India has little power in determining such terms of trade, which emerge not because of the differential lobbying power of particular classes but because of the workings of political economic variables such as labour productivity in industry, the real wage and industrial mark-up and import prices. This view contests both 'urban bias' and 'rich farmer lobby' sets of theories. Secondly, it is argued that terms of trade movements (trends) in themselves have not affected either the real incomes of the rural poor or rates of agricultural investment and growth. Thirdly, it is suggested that the causes of industrial growth or stagnation are not to be found in such terms of trade movements, although the latter may affect the pattern of industrial demand and therefore the allocation of investment. These arguments and others are elaborated below. The first section describes the movement of agricultural-industry terms of trade since the early 1950s and isolates three major phases. Various explanations are considered, and a detailed consideration is made of the factors affecting terms of trade in the latest phase. In the second section the question of the impact on agriculture is taken up, in terms of how the rural poor as well as cultivators who are net sellers are affected. The