The overall share of agriculture in India’s gross domestic product (GDP) has been declining continuously from 25% in 2002 to 17% in the present. Yet, agriculture still contributes a substantial chunk to the GDP, making it a very important sector for India’s growth. The performance of this sector is very crucial to the overall Indian economy not only with regard to GDP but also as a major percentage approximately (60%) of the Indian population depends on agriculture for their livelihood. So far, rainfall in India this year is 23% below par and this is a major cause of concern as the impact could be significant. Monsoon in the northwestern region of India, the food bowl of India, is 40% below average. If agricultural production declines, then that would directly impact the income of people associated with this sector. Further, the economy as a whole and the GDP will be severely affected. This factor would lower food production and at the same time, lead to price rise. Hence, the significance of the monsoon for the economic system cannot be under-estimated.
The fact is that agriculture remains the basis of economic growth for most South Asian countries. The economies are therefore affected directly by the vagaries of monsoon, which has far-reaching implications for agricultural productivity and commodity prices. Around 65% of food grain production is undertaken during the monsoon period and approximately 60% of the population in South Asia depends on crop husbandry, animal husbandry, fisheries and forestry for food, income and employment. Since agriculture is the also the basis for industrial development, supplying the raw materials for manufacturing industries and stimulating industrial output, the monsoon can directly affect government savings, public investment and foreign exchange reserves.
Monsoon: major climatic occurrence
No other climatic occurrence affects the lives of so many people around the world than the monsoon. Economies that are dependant on agriculture critically depend on the rains. India primarily depends on the rains for its agricultural produce as ninety-five percent of all rice, which is the staple diet of a large section of the population, is produced during monsoon. The impact of an abnormal monsoon can be tremendous and the damages can cost in millions. An abnormal monsoon can result in the loss of seasonal employment, shortage of food and income, spread diseases and have an impact on agricultural growth, inflation, economic activity and overall market sentiments.
Over the last decade, research has indicated that global warming has resulted in the shift in the monsoon patterns, which has adversely impacted the overall agricultural production. Since the beginning of this year’s monsoon, its advancement became slow into the country. If we see from the chart below, the rainfall in the month of May 2009 was scanty over the regions but has gained momentum since the beginning of July 2009. Most of the farmers, being small with marginal holdings, their dependency on rains is even all the more as they have poor irrigation facilities. We as a country have done less on monsoon management and rainwater conservation as compared to many other nations.
El Nino
The lackluster performance of the south-west monsoon had sent a shiver across the country. The expected emergence of El Nino, a situation of the warming of the Pacific Ocean that influenced the Indian monsoon adversely has added to the concern. The El Nino looks significant this year and is historically associated with sub-normal monsoons. A strong El Nino could lead to a monsoon failure in Asia and droughts in Australia as well as wetter than normal weather in parts of South America.
A historical snapshot
In 1965-66, rainfall was about 20% below normal in 14 of the 32 meteorological subdivisions on India. This led to a substantial decrease in rice production and food crisis. An abnormally wet monsoon is beneficial as it improves ground water availability and allows growth of good crops. In the recent years, 2002 witnessed one of the worst droughts resulting into loss of grain production and dragged agricultural growth. On the backdrop of this, the GDP growth slowed from 5.8% to 3.6%.
Food grain stocks
Poor rainfall can have an obvious impact on food prices, thereby impacting inflation. However, India has some respite in the form of comfortable levels of food grain stocks. In 2002-03, the release of these stocks helped to contain rise in inflation, mainly in food grains. The government has declared that it has sufficient food grain stocks to meet demand under the public distribution system (PDS) and other welfare schemes during 2009-10. Food grain stocks as on June 1 stood at over 535 lakh tonne against the government’s annual requirement of 496 lakh tonne. The breakup of the food grain stocks constitutes – 204.03 lakh tonne of rice and 331.22 lakh tonne of wheat. At the current level of allocation, the annual requirement of food grains is around 446 lakh tonne of PDS and about 50 lakh tonne under other welfare schemes. Hence, even if the impact of poor rainfall in India will be negative, prices will be controlled from spiraling as India has adequate food stocks to manage the situation.
India’s wholesale price index (WPI) declined 1.17% in the 12 months to July 11, compared to the previous week’s decline of 1.21%. This situation of inflation is a product of slower demand from the manufacturing sector and the elevated base effect. We expect inflation to remain subdued during the medium-term and inch higher towards the end of this year. Though the WPI has declined, consumer price index (CPI) remains at substantially elevated levels on account of higher food, beverages and tobacco prices. The decline in WPI suggests that the Central Bank is unlikely to start increasing interest rates in the near future. If rainfall remains insufficient despite current spells of rain, then inflation may accelerate and raise concern for food prices. However, available food grain stocks could cap the upside in agricultural commodity prices.
A nod from the rain gods
According to the Indian Meteorological Department (IMD), the cumulative seasonal rainfall for the country has been 34% below the Long Period Average Rainfall (LPA) from June 1 to July 9. If rainfall is below 10% of LPA, then it constitutes a drought. However, relief has come in by way of the recent rain that has filled the top reservoirs to a very large extent. Even then, the levels are 27% below normal. But the time to grow paddy may have run out and if done any later, it could affect the quantity along with quality. Rains since the beginning of July have improved significantly, thereby raising hopes that the monsoon for the country as a whole could be close to normal.
In the coming days, rainfall is expected to be normal in the northwest region too, being the worst hit. The crop-producing states of Uttar Pradesh, Haryana, Uttarakhand, Chandigarh, Punjab, Delhi, Gujarat and Himachal Pradesh have witnessed rainfall deficiency of 60% or more, which continues to remain a major cause of concern.
Further impetus to growth
The Indian government is aiming at a better economic environment for farmers. Initiatives like improving upon the value chain in terms of infrastructure facilities in rural areas, accelerated irrigation provisions, easier borrowing mechanism, increasing the warehousing/cold storage facilities to reach across the country by providing incentives etc shall go a long way. Further, to bridge the rural-urban divide and ensure that the aam aadmi remained at the centre of the development process and its programmes and schemes, budgetary allocation for all rural-focused schemes have been increased by 45% – 144%. The Budget 2009 – 2010 is aimed at further stimulating demand in rural India, which has also been responsible for revival in many industrial sectors recently, despite the economic downturn. This would go a long way in transforming the Indian agricultural sector. It will help in developing the spot markets, mandis and lead to better and efficient price discovery in agri commodities.
India, being an agriculture driven nation and farmers majorly relying on monsoon, they stand handicapped if the rains are not on time. If we see the overall distribution of rainfall, the northern region has not received adequate rainfall for its kharif sowing. Crops which stand at risk are paddy, pulses, bajra, cotton, soybean and sugarcane. If the overall rainfall in the country remains deficient in the current season, we shall expect the prices of these commodities volatile and may touch higher levels.
Last but not the least, we are of the view that unless we raise our level of commitment towards agricultural sector as a whole, we shall not be able to make India a developed nation. We have to develop our irrigation facilities all across India so that our dependence on the monsoon reduces over a given period of time.
Further, unless we work towards improving the financial conditions of our farmers as a whole, we shall continue to be greatly affected by the vagaries of nature.
Forcing nature to behave as we wish is wishful thinking, but at least we can prepare ourselves to the fullest extent possible so that the adverse impact is reduced in intensity. Times are challenging and it’s for us to rise to the challenge to reduce overdependence on the monsoon, if we are to protect ourselves and not be at the complete mercy of nature.
The author is associate director (commodities and urrencies), Angel Commodities
