Going gets tougher: What do the Iraq crisis, poor monsoon mean for you
A patchy monsoon trims food output and hits farm income, which supports a third of Indians. On the other hand, the Iraq turmoil may lead to an increase in wholesale prices, write Zia Haq and Gaurav Choudhury.india Updated: Jul 06, 2014 11:22 IST
Bollywood star Preity Zinta and paddy-grower Barho Mandal, a poor farmer in Bihar’s Saharsa, and finance minister Arun Jaitley live in starkly different worlds. Yet, each of them can’t escape pondering over the alluring monsoon sky at this time of the year.
“Nice 2 see Mumbai drenched in the faint showers of the monsoon,” Zinta tweeted when the rains soaked the city on Wednesday. “Sadly the monsoon will be short & brief this year,” she went on to say, betraying a sense of disappointment.
About 900 miles to the east in Bihar, Mandal’s stake in the rains is much higher than the movie star’s. For him, the rains help break the barriers of survival.
By June-end, Mandal’s three-acre farm, which HT visited in 2009 when India had its worst drought in three decades, glows an iridescent green with germinated paddy saplings. This year, the truant monsoon has brought back memories of hardship that visited him four years ago. “I have bought hybrid seeds and fertilizers worth Rs 7,000 on credit. If the rains don’t come, I’ll be ruined,” Mandal told HT over the phone.
Mandal’s fears aren’t misplaced. The monsoon is the lifeblood of Asia’s third largest economy. Over 4,000 years ago, a sudden weakening and change in the pattern of the monsoon may have led to the collapse of the mighty Indus Valley civilisation. A team from the University of Cambridge researching the impact of climate change on the ancient civilisation found that a drought from a weak monsoon falls within the radiocarbon age range for the beginning of Indus de-urbanisation. The findings were published by the journal of the Geological Society of America as part of a larger research project funded by the British Council UK-India Education and Research Initiative.
Although the rains have picked up, they have been 43% deficient till July 3. A patchy monsoon trims food output and hits farm income, which supports a third of Indians, or about 800 million people. Rural spending on most items — from television sets to gold — goes up with adequate rains and farm output.
This aids economic growth, keeps jobs and investment going. A rise in rural consumer spending explains why India’s rural markets are important. For instance, rural buyers now account for close to 40% of India’s total motorcycle sales.
If the showers aren’t evenly distributed and remain poor, it can result in a big stumbling block for the new government, which must take some sharp measures to pull the country’s economy back from the brink.Just four years ago, India had a widespread drought, resulting in record food prices. The recession had begun roiling world markets. India quickly shielded her industry with a stimulus. Healthy rates of savings and investment of over 30% of GDP helped the then UPA government keep the economy growing. This time, it’s different.
Work backwards and you know why. The situation is perilous. India is afflicted with stagflation, a fancy economic label that fuses the terms, low growth and high inflation and the economy’s equivalent of the plague. This is the first time in 25 years the country’s growth will end up below 5% in two successive years. Retail prices have averaged 10%. An index that gauges industrial production remains ridiculously low.
Worse, public finances are in a mess.
India’s fiscal deficit — shorthand for the amount of money that the government borrows to fund its expenses — in the first two months of the 2014/15 financial year touched Rs 2.40 lakh crore or 45.6% of the full-year target, government data shows. There’s little room for extra spending. Simply put, it’s like being slapped with a steep hospitalization bill when you’re already broke.
In a post on his Facebook page on June 1, finance minister Arun Jaitley did signal the government’s commitment to walk the talk on fiscal discipline. “We must move towards an era of fiscal discipline where we can reduce the fiscal deficit, contain inflation and improve upon our growth rates. India must prepare itself for this,” Jaitley added.
Tough measures, like cutting subsidies, mean prices going up. High inflation is bad news for growth. It’s a tightrope walk. The government looks determined to take unpopular course-correction measures initially, rather than risk taking them later.
“Like it or not, there will be bitter pills. Gas prices will eventually go up. The subsidy bill will have to cut. A lot depends on these reforms,” an official said. If “fiscal deficit” can’t be plugged, India runs the risk of being downgraded as an investment destination, scaring investors away. Lack of investment means the NDA government can’t create jobs, cities and set the country on the path to high growth again.A bad monsoon — as has been officially forecast — can have a "50-basis-points downward impact" on the country’s GDP estimates for 2015, says Citibank economist Rohini Malkani.
Low growth has already hit small-scale skilled workers, such as Shashi Kumar, a worker at a fabric manufacturing unit in Haryana’s Panipat, a textile hub often called the Manchester of the East. At the factory where he works, KM Fabrics Pvt Ltd, international orders have been sluggish for two years. “We had to forego bonuses for two years,” the firm’s manager Ravikant told HT. Kumar says a salary cut means he has to frequently borrow from friends to keep his family in UP going.
For the Modi-led government, the “honeymoon” period — a term that refers to the initial tenure when there is less scrutiny and criticism of a government because it is new — seems to be fast ending. “Look at how onion prices are rising? Now media reports say LPG prices will go up too. Modi must do something?” says Ratna Singh, a housewife in Delhi, who says Rs 48 for a kilo of onions is too much.
Some economists see the fretting over the monsoon as somewhat exaggerated. One, the rains are improving and will pick up further after July 9. And without high growth that creates high demand for goods, poor rains alone need not necessarily raise inflation beyond a point.
The dependence of farms on the monsoon has reduced considerably over the years, with summer-sown crops and winter crops now contributing equally to overall food production growth. Fruit and vegetable prices historically shoot up on account of excess or unseasonal rains.
Moreover, during previous occasions of poor monsoon, such as 2002 and 2004, retail prices were low at an average of 4.1% and 3.9%. Some inflation-fighting steps, such as the release of more grains, the proposed de-listing of fruits and vegetables from an archaic farm marketing law and raising the minimum export price for onions and potatoes should soften prices.
The real jitters are emanating from the turmoil in Iraq, which can get the government tangled in a mess with its domino effect. A persistent increase of 10% in crude oil prices (which is roughly $10 per barrel) can increase India’s wholesale prices by roughly 0.7% directly, assuming that LPG and kerosene continue to be subsidised and diesel prices continue to rise.
A 5% spike in oil prices has already hit India. “Our commodities team believes that Iraqi supply growth remains critical for current and future oil balances, and thus this crisis assumes importance for India.” Malkani calls the Iraq crisis and the monsoon deficiency two “macro spoilers”.
India imports 75% of its domestic oil consumption, of which 13% is from Iraq, which represent 36% of India’s total imports. India’s planned oil imports from Iraq in the current year are to increase to 20% (19.4 mn metric tonnes) of its total requirement. Some analysts say rising oil price due to the Iraq crisis can have far more serious consequences that the patchy rains.
The Iraq crisis has the potential to widen the current account deficit, as more dollars are used up in buying expensive oil. This can put pressure on the exchange rate, leading to a weaker rupee, hampering fiscal consolidation, which Jaitley has intended. Inflation can keep the RBI from lowering interest rates, necessary to revive investment.
All these possibilities could come in the way of the revival of economic growth in the country, says Madan Sabnavis, chief economist with Care Ratings. “The bottom line (is that) the Modi government clearly has its hands full,” Malkani said.