The prospects of a bountiful farm output following the forecast of normal monsoon this year may not provide any relief to policymakers in their battle against high prices, some economists feel. With the demand-driven inflation already strong, increased rural income from a good harvest could only aggravate underlying price pressures, they reckon. Higher farm income could lead to a rise in demand for fast moving consumer goods and consumer durables like two-wheelers and cars.
India has been struggling with high inflation since 2009 after food prices surged to a two-decades? high following the monsoon failure. In this backdrop, normal rainfall during the four-month long rainy season should help the production of rice, sugar and cotton and moderate food inflation. But a section of the policymakers think that whatever salutary effect on inflation from increased supply of foods could be offset by the rise in demand for sundry products in rural India.
The domestic food grain output is expected to touch an all-time high of 235.88 million tonnes in 2010-11, up 8.1% on the year before, helped by normal monsoons and winter rains which spurred record high production in wheat, pulses, oilseeds and cotton.
“This (pick up in demand) is surely a flip side of good monsoons. Rise in rural incomes will push demand which can fuel inflation. RBI in its policy has pointed out that demand will pick up and hence it will have to further tighten its monetary stance to battle inflation,” said Abheek Barua, chief economist, HDFC.
According to IMD?s forecast, south west monsoon rainfall, which usually supports most of the kharif agricultural activities in the country is likely to be 98% of the long period average (LPA) with a probable error of plus or minus 5%. A good monsoon this year should further boost food grain output, which, in turn, should cool overall inflation. But India?s inflation woes are no longer emanating from food. Rather, inflation has become largely demand-driven with non-food manufacturing inflation ?proxy for rising demand pressure?hitting a 29-month of 7.1% in March.
?It?s true that good monsoon will keep supporting rural demand due to higher incomes which can potentially be an added push for demand driven inflation,? said Siddhartha Sanyal, an economist with Barclays Capital in Mumbai.
About two-thirds of population live in rural areas. Even as per capita consumption is assumed low but the sheer numbers help rural and small towns account for more than 50% of India?s income. Also, schemes like rural employment guarantee have put more money in the hands of rural consumers.
In 2008-09, it was robust rural demand that helped economy stay afloat following the global financial downturn by offsetting a demand contraction in urban India.
Rural demand is attracting a corporate sector hungry for growth opportunities. Companies like Hindustan Unilever, Godrej, Maruti Suzuki India and Hero Honda Motors sell a big chunk of their products in rural India.
The Reserve Bank of India has also forecast inflation to stay at an elevated level in the first half of the year, before gradually moderating to 6% by March 2012. But private economists see wholesale price-based inflation at around 7.5% by the end of this fiscal year.
The RBI has raised its policy rate by 250 basis points since March 2010 in nine moves to 7.25% and most analysts expect the rate to rise up to 8% by December this year.