FY22 agri inflation at six-year high, but did farmers reap full benefit?

Though Indian farmers may have gained from higher than usual inflation in crop prices, they have also had to pay more for their inputs and other items of consumption and service

The latest Gross Value Added (GVA) numbers for agriculture and allied activities released by the Ministry of Statistics and Programme Implementation (MoSPI) for 2021-22 shows that last fiscal, the inflation rate in agriculture and allied activities was the highest in the past six years, that is, since 2015-16. The question, however, is how much of it has actually benefited the farmers, because the sharp spike in inflation in non-farm activities impacted the terms of trade for the sector.

In layman's language, terms of trade for agriculture broadly means the price paid for buying inputs for raising agricultural crops versus the prices received from selling the agricultural crops.

According to the latest National Income estimate released on May 31, the deflator in agriculture Gross Value Added (GVA) is projected at 7.3 per cent in FY22. The same metric in the case of non-agriculture GVA, which largely consists of industry and services, is projected at 11.1 per cent.

The deflator measures the change in prices. This will be the first time since 2018-19 when the terms of trade for agriculture and allied sectors have been negative.

Economists said that this, in very broad terms, means that in FY22, though Indian farmers may have reaped the benefit of higher than usual inflation in crop prices, they have also ended up paying more for their inputs and other items of consumption and service.

Some economists feel negative terms of trade also have a bearing on the broader income of a farming household.

In FY21, the deflator in agriculture was 4.2 per cent while that in the non-agriculture sector was 2.2 per cent. And in FY20, the deflator in agriculture was 5.3 per cent while that in non-agriculture GVA was 2.5 per cent.

A few months back, Dr S Mahendra Dev, Director and Vice Chancellor of Mumbai-based Indira Gandhi Institute of Development Research (IGIDR), had told Business Standard that negative terms of trade in agriculture which happened in FY22 basically show that farmers are paying higher prices for inputs such as diesel and fertilisers. and also for consumption services such as health and education in comparison to the prices they fetch for their produce.

He said terms of trade have also reversed as core inflation (non-food and non-fuel) has risen at a faster rate than food inflation.

“Though output of food grains, horticulture, milk and other items are at record highs in Fy-22 and the price in them is also good but it might not have helped farmers much as the price of items that he consumes either as inputs or as services have grown at a faster rate,” Dev had then said.

Production highs and growth

The FY22 GVA numbers also showed that India’s farm sector grew at a healthy 4.1 per cent in the fourth quarter of that fiscal, up from 2.8 per cent at constant prices during the corresponding period of the previous year. However, for the full-year growth was a tad lower at 3 per cent as compared to 3.3 per cent of FY21.

MoSPI data shows that at current prices, agriculture and allied activities grew at 15.2 per cent in Q4FY22, compared with 6.2 per cent during the corresponding period of FY21.

This delivered an inflation impact of 11.1 per cent (3.4 per cent in FY21).

The growth in Q4FY21, say experts, reported a healthy 4.1 per cent rise largely due to performance of the non-crop sector such as horticulture, floriculture and animal husbandry and good exports in the January to March 2022 period.

Any growth between 3.5-4 per cent for the farm sector is considered above the long-term trend line.

However, for the full year, GVA for agriculture and allied sector is expected to be marginally lower than FY21 at 3 per cent due to a drop in wheat production.

Wheat and cotton production according to the third advance estimate of agricultural output released on May 19, 2022 is estimated to have dropped by 4.4 per cent and 7.4 per cent, respectively, from the second estimate released in February 2022. This was largely due to the impact of the intense heat wave in March, preceded by a pest attack on the cotton crop.

The actual impact of these unforeseen weather events on crop output and their corresponding effect on agriculture GDP will get more pronounced in the coming quarters i.e. first quarter of FY23.

Moreover, going forward, most people feel that if the monsoon remains healthy, the farm sector might see healthy growth in FY23 driven by good harvest and steady prices.

The India Meteorological Department (IMD) today updated the forecast for 2022 southwest monsoon to 103 per cent of the Long Period Average (LPA) from 99 per cent predicted in April as La Nina conditions are expected to prevail during the entire stretch of four-month monsoon season. 

Table: Movement of agri and non-agri GVA growth

Indicator	2017-18	2018-19	2019-20	2020-21	2021-22
Nominal agri GVA growth	12.3	7.1	10.8	7.5	10.3
Real agri GVA growth	6.6	2.1	5.5	3.3	3.0
Deflator in agri GVA	5.7	5.0	5.3	4.2	7.3
Nominal non-agri GVA growth	10.7	11.6	6.0	-3.9	20.2
Real non-agri GVA growth

6.2 6.5 3.5 -6.2 9.1 Deflation in non-agri GVA  4.5 5.1 2.5 2.3 11.1

Figures in %ages; Source: MoSPI