Agriculture: Intentions and Actions

For agriculture the period since 2004-05 has been different from previous periods in several respects. The sector recorded 3.8% annual growth in value added in the decade since 2004-05 which is the highest in any decade since 1950-51 (Chand 2014). The decade also witnessed a reversal of the slowdown in annual growth of agriculture, a slowdown which started after the mid-1990s and breached the 2% mark between 1996-97 and 2004-05. However, this impressive achievement in growth has been accompanied by formidable challenges since much of the growth was driven by an increase in real prices of farm produce which increased by 31% during 2004-05 to 2011-12. Based on the elasticity of gross domestic product (GDP) agriculture to terms of trade, it is estimated that about one-third of the growth in farm output resulted from an increase in real agricultural prices. Some increase in real prices was justified to correct the decline witnessed during 1998-99 to 2004-05, but the ratio of the Wholesale Price Index (WPI) agriculture to WPI (non-agriculture) has risen steeply after 2005-06 at an unprecedented pace.

This nexus between price increase and growth has serious implications for maintaining growth in the sector. It implies that, ceteris paribus, if agricultural prices rise at the same rate as all other prices, then the growth rate of agriculture will witness a sharp decline from the present. This growth and food inflation trade-off is the biggest challenge for the new government at the centre, and the Union Budget for 2014-15 was expected to rollout concrete measures and a clear strategy to break this nexus so that food inflation could be contained without any serious adverse effect on output growth.