Use this to drive meaningful agriculture reform
Since the Met has already revised its monsoon forecast quite dramatically—the probability of a below-90% monsoon is up from 23% to 33%, not too different from the 90-96% monsoon probability of 38%—it is just possible that the July forecast may throw up worse news, more so since the probability of an El Nino event is also up from 60% to 70%. While this means the government has to ready its drought-preparedness, including distribution of short-duration seeds and making provisions to transport fodder, it is important that it use the crisis to drive through important reforms in the agriculture sector, especially in the operations of the Food Corporation of India (FCI).
If that is done, it will ensure poor/deficient rains do not convert to raging inflation. The experience of previous periods of poor rain is instructive. For starters, given the latest Met prediction—15% shortfall in north-western India, 6% in central, 7% in south and 1% in north-east—it suggests the crop damage may not be that serious since the north-west is also the most-irrigated. What also makes a big difference is whether the previous year was a good monsoon one—last year, for instance, was a good year, as a result of which reservoir levels are 57% above the 10-year average. Of the three poor monsoon years in the last decade, agriculture production was negative in only 2002. The 80.8% rain in 2002 came on top of a deficient 92.2% monsoon in 2001—both 2004 and 2009 were preceded by good monsoon years, so while foodgrain production fell 18% in 2002, it fell just 7% in both 2004 and 2009.
A combination of the previous year’s rain and the hike in minimum support prices (MSP) is what determines the impact of a poor monsoon on inflation. As today’s page 1 graphic shows, while 2002 was a very bad year—rainfall was 80.8% of normal and foodgrain production fell 18%—this was a year of moderate inflation (WPI rose 3.4%, food WPI 1.8% and fruit/veggies 0.7%). In 2009, rainfall was worse at 78.2%, but this came on top of a healthy 98.3% monsoon the previous year—yet, food WPI soared to 15.3%. The difference in food inflation was due to the fact that, in 2002, there were very small hikes in MSP of 0-1.6% in rice and wheat while, in 2009, the hikes were in the 8-11.8% region.
Which is why it is important that, this time around, the government follow a smart strategy. Dumping 10-15 million tonnes of wheat and rice from FCI stocks could reduce inflation in these commodities to zero and shave off a fifth from CPI inflation—based on FY14 numbers. Stopping open-ended FCI procurement could shave off R70,000 crore from this year’s expenditure— FCI stocks are 27 million tonnes more than what is required—and if MSP-type support is replaced by per-acre cash subsidies, this would incentivise farmers to move away from rice/wheat to more lucrative, but volatile, fruits and vegetables, further dampening price pressures here.
Though a deficient monsoon should logically mean lower production of foodgrains as well as fruits and vegetables, and hence higher inflation, history suggests this is not necessarily true, reports fe Bureau in New Delhi.
What happens to both production as well as inflation depends upon a combination of circumstances. If years of deficient rain — the Met has forecast a 33% probability of a monsoon rain of under 90% of the long period average this year — are preceded by a year of good rainfall, the impact is more muted. Last year, for instance, was a good year, and reservoir levels are 57% above the 10-year average. Given the greatest impact of the poor monsoon is expected in northwest India — a 15% shortfall is expected here — and this area is highly irrigated, the impact on production will be less.
The year 2002 saw an 80.8% monsoon level, on top of a fairly poor 92.2% rainfall level in 2001. As a result, foodgrain production in the year fell a whopping 18%.
The year 2009, by contrast, had an even worse rainfall level of 78.2%, but this was preceded by a healthy 98.3% monsoon precipitation the previous year — as a result, foodgrain production in 2009 fell by just 7%. Quite the same thing happened in 2004, another poor monsoon year with a precipitation level of just 86.2%.
The price impact, in turn, is not just dependent upon the rainfall, a lot depends on how minimum support prices (MSP) are raised. In 2002, despite the dramatic fall in production, inflation levels were subdued, not just in overall terms, but also for foodgrains as well as fruits and vegetables. In 2009, however, while food production fell 7%, inflation levels were much higher. The reason is that MSP hikes in 2002 were muted (1.6% for wheat and nothing for rice) versus hefty MSP hikes in 2009 (11.8% for rice and 8% for wheat).