Agriculture?s share in India?s GDP has come down to around 15 per cent, but it is more important than ever for ensuring stable supply of food at reasonable prices. Food inflation has already remained elevated at over 15 per year per cent in 2009-10 and 2010-11. Inadequate irrigation facilities mean that Indian agriculture continues to depend heavily on rainfall and, hence, food prices flare up in a year of weak monsoons. The recent bout of high food inflation was primarily triggered by the monsoon failure in 2009. But other factors such as falling agricultural productivity, changes in dietary habits, and increased demand for food due to social safety net schemes like MGNREGA, have also pushed up food prices.
Globally, food prices surged this year due to floods in Australia and drought in Russia. Global food inflation was 37 per cent higher (on a year-on-year basis) in March 2011, with wheat and rice inflation at 62 per cent and 10 per cent, respectively. This implies that the import of foodgrains, if needed, will be expensive. Therefore, a normal monsoon would play a very critical role in keeping food inflation at low levels. In addition to ensuring a stable supply of foodgrains, monsoons have an important role in ensuring replenishment of reservoirs, drinking water availability and hydro power generation.
Recent data shows that bad monsoons are more of a risk to food inflation than to India?s overall GDP growth. In 2009-10, for instance, though rains were 23 per cent below Long Period Average, the overall GDP expanded by 8 per cent, but food inflation crossed double digits. In 2004-05, despite poor agricultural performance, healthy growth in non-agricultural GDP ensured an overall growth of 7.5 per cent.
India receives over 73 per cent of the rain during the Southwest Monsoon Season, which begins in June. The Indian Meteorological Department (IMD) uses a five parameter statistical model to generate the Long Range Forecast for the Southwest Monsoon Season (June-September). Using the data up to March 2011, IMD has forecast 2011 monsoon season rainfall at 98 per cent of the Long Period Average. The forecast has a 5 per cent margin of error. IMD has accorded low probability to deficient rainfall (below 90 per cent of Long Period Average) during the year.
Considering the persistently high food inflation in the last two years, IMD?s projection of a normal monsoon in 2011 comes as a big relief. But how reliable are these initial forecasts? In the last few years, monsoon failures in India have become more frequent and less predictable. IMD had previously failed to predict two severe monsoon failures?in 2002 and, more recently, in 2009. Despite a normal monsoon forecast in 2009, rains were at a 37-year low, with parts of the country witnessing severe drought. The frequency and severity of drought in different parts of the country has also increased in the past few years.
An overall normal monsoon is necessary but not sufficient to ensure a normal agricultural production. Apart from the timeliness of rains, its geographical spread and the vulnerability of a region are also critical in determining the impact of monsoons on agricultural production. The months of July and August are considered to be most critical from an agricultural standpoint. The first bit of good news is that monsoons are expected to be normal this year, but we are still clueless about their distribution. If monsoons do not belie IMD?s expectation this time, and if they are well distributed temporally as well as spatially, we expect agricultural GDP to grow at 2.7 per cent in 2011-12. The decline in growth vis-?-vis 5.4 per cent in 2010-11 would mainly be the result of a high base.
The monsoons have a diverse impact on different states. The vulnerability of major states in terms of the percentage of unirrigated area has been outlined in the table above. States with lower coverage of irrigation, higher dependence on agriculture and larger proportion of rural poor generally take a greater hit when monsoons fail. Madhya Pradesh, Bihar, Maharashtra and Orissa are the most vulnerable states. Besides the loss of crops, the rural poor are also badly affected by the drying up of rural employment opportunities. While the loss of crops hurts subsistence farmers the most, landless labourers are the worst affected by the drop in rural employment opportunities. Employment creation through the MGNREGA had helped compensate for the reduced job opportunities in rural areas to a great extent.
Despite their waning importance in shaping the growth rate of India?s GDP, good monsoons do bring cheer to the stock markets, FMCG sector, auto players and other manufacturers with rural exposure as they generate additional demand. No wonder, stakeholders with rural exposure still look up to the rain gods every year in the hope of being blessed with that extra kick to their performance.
The author is chief economist, CRISIL. Views are personal