FOCUS NATION Rasananda Panda and Robin Infant Raj
Indian economy is still a gamble in the hands of monsoon
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BLURB
Two consequent monsoon failures could cause major damage to the buffer stock of essential agricultural products, thereby putting pressure on the existing inventory of agricultural products that had helped the nation last year in keeping the price level within acceptable limits despite a poor monsoon
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Recent technologies have helped climate scientists predict weather conditions in near-accurate ways. Indian Meteorological Department (IMDs) in its latest prediction says this year’s south-west monsoon, starting June 1, will be below normal, ranging 93 with a plus or minus of five per cent of long period average (LPA) against the normal range of 96-104 per cent.
The predictions include 28 per cent normal monsoon, 35 per cent below normal, and 33 per cent deficient rainfall. There, thus, is a need to be wary about its impact on food grains production as also national economy. If the monsoons are bad this year as well, for the second consecutive year, there could be a major problem even in the irrigated areas. Groundwater levels would have been depleted.
The near normal rainfall, as predicted, may not impact that much in the eastern, western and southern parts of India, and this would suffice to produce normal crop production. Hence, a shortage of rainfall would not interrupt the usual course. Similarly, in the northern parts, rain shortages are mitigated by better irrigation systems and snowmelt. In the central parts, where agriculture is mainly fed through monsoon rainfall, a deficiency in rainfall will alter food grain production and might have other adverse impacts too. Supply and prices of agricultural commodities such as cereals, pulses, oilseeds, vegetables, fruit and livestock products, and rural sector demand for consumer goods would be adversely impacted by below-normal monsoon rainfall, as predicted, as these commodities are primarily dependent on rain-fed agriculture.
In addition, two consequent monsoon failures could cause major damage to the buffer stock of essential agricultural products, thereby putting pressure on the existing inventory of agricultural products that had helped the nation last year in keeping the price level within acceptable limits despite a poor monsoon. This, in turn, would have an influence over food prices going up and/or rural demand for agricultural inputs going down. Both, combined, would disturb farm productivity that will also affect economic productivity.
Needless to say, a fall in farm productivity will reduce the income of the farmers and farm labourers. It will also limit favorable policy interventions towards farms and farmers, aggravating the indebtedness of farmers and the rural communities, leading to unfortunate situations of farmer suicides.
Predictions about El Nino this year for India would add to the growing woes in the agriculture sector. If the scenario of insufficient rainfall persists throughout the year, there is a possibility of food inflation as had happened during 2002 and 2009 — which were also El Nino years.
In the last decade, El Nino had occurred four times in India, causing droughts for the years 2002, 2004 and 2009, while 2006 had a normal monsoon despite El Nino’s presence. Hence, economists are not sure whether this year’s prediction of below-normal monsoon along with El Nino’s occurrence would cause drought, affecting crops and food grains production, which in turn, results in high inflation. The possibility is very much there.
Sources from the National Commodity and Derivatives Exchange Ltd (NCDEX) indicate a rise in the prices of essential agricultural commodities for the period June to September by 6 to 7 per cent. This would obviously spread in spot market as well, leading to a northward pressure on inflation. Back-of-the-envelop calculation suggests that if agricultural GDP (of 3.6 per cent for FY15 as targeted) will be affected by deficient rainfall, it would eventually have an influence on GDP growth, which is estimated to be 8.1 per cent for FY16. It may fall to around 7.5 per cent or so.
To put in an overall macroeconomic contest, there will be a chain reaction. Agriculture output will fall, causing farm incomes and rural demand to decline. There will be a spillover impact on industry from higher cost of agricultural inputs. The government will be under pressure to increase the minimum support price, thus making food prices volatile. Consumer Price Index inflation, where nearly 40 per cent weight is related to agriculture-related products, could rise above the current forecast of 5.8 per cent for fiscal 2016. That will mean RBI’s inflation target of six per cent by March 31, 2016, gets breached in the very first year of adoption of the new monetary policy framework.
Also, RBI will have less leeway to continue with its current easing cycle. At the same time, an increase in MSP will increase farm subsidy and also government expenditure. As a result, what would happen are an increase in fiscal deficit and crowding of private investment. Stretching it further, it would lead to a weakening of rupee, increase in oil import bill and widening of current account deficit. This is likely to result in a fall in both domestic and foreign investment (largely FII) at least in the short-to medium term. Increase in the domestic price of petroleum products will be a logical eventuality.
An indication of all these can be found in the recent five-month low in stock market indices like Sensex and NIFTY, rupee weakening to a 20-month low with a prediction that it may go up to Rs. 65.50 per dollar in the near term and an increase in petrol and diesel prices. This, together, reinforces the age-old maxim, “Indian economy is a gamble in the hands of monsoon.”
Rasananda Panda is Professor of Economics and Robin Infant Raj is Research Associate in General Management Area, at MICA, Ahmedabad