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India-Price Policy and Terms of Trade

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After independence, India's initial price policy could be characterized as serving the interests of the consumers, particularly where food grains were concerned, and most of all in regard to wheat. Food prices were kept low to provide cheap food for urban consumers under the theory that a cheap and easy supply of wage goods--of which food grains formed the main component--would inhibit inflationary pressures on the economy. This policy, buttressed with imports under the United States Public Law 480 Food for Peace Program, kept prices at a low level during the late 1950s and early 1960s but did not provide incentives for Indian farmers to invest or increase production. The terms of trade vis-à-vis manufacturing were favorable to agriculture in FY 1959 and then on a par with other sectors for three years. Thereafter, when manufacturing prices went up faster than agricultural prices as a result of government policy, terms of trade favored manufacturing and turned against the agricultural sector. This change led to a food crisis in the mid-1960s when agricultural production fell.

From about 1965, the need to guarantee remunerative prices to farmers was stressed to ensure self-sufficiency in food-grain production as soon as possible. The Agricultural Prices Commission--in 1993 called the Commission for Agricultural Costs and Prices--was set up to advise the government on agricultural prices, keeping in view the interests of both the consumer and the producer. Of particular concern were prices for wheat, rice, coarse grains, pulses, sugarcane, oilseeds, cotton, and jute. In the late 1980s and early 1990s, the commission was supplied with cost of production data, compiled through sample surveys, to improve its effectiveness in setting prices. The commission was reasonably successful in providing remunerative prices for farmers. It used the price mechanism to increase the production of commodities in demand, such as oilseeds at the end of the 1980s, and to keep prices at a reasonable level for consumers.


Data as of September 1995

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