Nominal vs Real growth: For farmer, it’s rise in income, not output, that matters

During the 10 years from 2004-05 to 2013-14, growth in real gross value added (GVA, at constant prices) from agriculture, forestry & fishing averaged 3.7 per cent a year.

Written by Harish Damodaran | New Delhi | Updated: December 7, 2017 6:20 am
For farmer, it’s rise in income, not output, that matters While agricultural output rose 3.7 per cent a year, farmers also benefited from prices going up almost 10 per cent annually.

Agricultural growth is often seen and analysed in “real” terms — i.e. how much farm production per se has gone up. But for farmers, what matters is not output, but income. In their case, it is growth in “nominal” terms — production multiplied by price — that counts.

During the 10 years from 2004-05 to 2013-14, growth in real gross value added (GVA, at constant prices) from agriculture, forestry & fishing averaged 3.7 per cent a year. The corresponding average growth in nominal GVA (at current prices) was even higher, at 13.5 per cent. Thus, while agricultural output rose 3.7 per cent a year, farmers also benefited from prices going up almost 10 per cent annually.

Things have played out differently, though, in the last three-and-half years. Not only does the average real GVA growth work out to only over 2 per cent between April-June 2014 and July-September 2017, but even the y-o-y rise in nominal terms after factoring in inflation averages only 6.8 per cent (see chart). In other words, farmers have seen both their output and produce prices growing at lower rates — these amounting to roughly 2 per cent and 4.8 per cent, respectively. The lower output growth can be partly attributed to drought in 2014-15 and 2015-16; the following year, in fact, registered a production rebound.

The striking trend, however, relates to prices, with the gap between nominal and real GVA growth rates narrowing down particularly from October-December 2016. The June 2017 quarter recorded this difference at minus 2 percentage points, implying a fall in agri prices. This softening trend in farm produce prices can be linked to the effects of demonetisation.

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One way to look at all these numbers is through the lens of “doubling of farmers’ income”, as envisioned by the Prime Minister Narendra Modi. When nominal GVA from agriculture, a proxy for farm incomes, was rising at 13.5 per cent a year, such doubling was possible every 5.33 years. But with nominal GVA growth at 6.8 per cent per annum, doubling of farm incomes would take over 10.5 years. That is way beyond the 2022-23 target date set by the prime minister.

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