India's mid-summer nightmare
As Asia's third-largest economy tries to claw out of a sharp slowdown, a patchy monsoon plays spoilsport by threatening to crimp food output, raise prices all around and pull down farm GDP necessary for overall economic growth. Zia Haq and Gaurav Choudhury report. Dummies guide to South West Monsoon | Clouded economy | Five things India must dobusiness Updated: Jul 29, 2012 02:07 IST
It's a long expedition nature undertakes each year. Drafts of early-summer breeze in the southern Pacific stream northwards, preparing to travel more than 8,000 km to reach Asia in time, picking up moisture along the way. Meanwhile, in central India, the temperatures are still rising. They will touch 40 degrees or more eventually. If the Pacific winds are one essential ingredient of a perfect monsoon, the Indian summer is another.
In due course, the winds will sweep the Indian landscape, with heat conditions just the right for "precipitation" or rainfall to shower down.
During its four-month journey across India, the monsoon hits Kerala in June, its first port of call on the Indian mainland. It then cuts off into two branches — one travelling over the Bay of Bengal and the other over the Arabian Sea, before typically covering the whole of India within a month.
Until recently, the monsoon was thought to be a distinctly Asian phenomenon. Monsoons do occur in other locations of the world too, such as in Europe, Africa and Chile. Until the 1990s, there was a debate if the June-September rainy season in the US was indeed a monsoon. Meteorologists ultimately classified it as the North American monsoon.
The June-September rains provide relief from a overbearing, sticky summer. Schools shut down. Families go on vacation. But the monsoon is more than just a cool respite: it is the life-blood of Asia's third-largest economy.
This year, a 21% deficiency in the rains has caused alarm. The monsoon, which acts as a strong check on inflation, is vital for not only the farm sector, but also the broader economy. They are critical for drinking, power and irrigation.
Just two years ago, India had its worst drought in three decades, resulting in high food prices.
A patchy monsoon trims food output and hits farm income, which supports two-thirds of the Indian population, 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 sharp rise in rural consumer spending explains why India's rural markets are important. For instance, rural buyers account for close to 40% of India's total motorcycle sales.
"We are more concerned about the impact of a weaker summer crop on primary food inflation (the whole price index)," said Chetan Ahya of Morgan Stanley Asia.
High prices essentially shrink household incomes, as middle-class Indians have to spend much more for the same amount of goods. Since the 2009-10 food-price shocks could not be controlled in time, they spread into what economists call "core inflation", or prices of non-food and non-fuel commodities.
India's retail prices are already high. On a year-on-year basis in June, vegetable prices rose the sharpest at 28%, while milk and allied products shot up 13.2%. Oil and fats rose 16.4%. Non-alcoholic beverages — like your can of soft drink — rose 9.54%. Prepared meals' prices — a proxy for restaurant rates — rose by 9%.
Eventually, high food inflation hits the overall economy and prompts the Reserve Bank of India to raise interest rates to suppress prices. Currently, high interest rates have made borrowing costlier for firms, which do much of their business on short-term loans.
"There are blunt instruments which can bring down inflation but also dampen growth. But we don't have a consensus on how much of dampening of growth is acceptable to bring down inflation," Kaushik Basu, India's chief economic advisor, said.
This year, normal rains are critical for India to claw out of a sharp slowdown. In the first three months of the current year, India's gross domestic product (GDP) grew 5.3% from a year ago, the slowest quarterly pace in a decade, taking the steam out of what was the few "engines of global growth".
Shortly after that in April, global ratings firm S&P revised India's rating outlook to "negative" from "stable" while another, Fitch, followed suit.
A drought-like situation, high prices and subdued demand for manufactured items could make the government's task of speeding up decision-making and pushing reforms more difficult.
Reduced availability of raw materials to industry is another potential result of an adverse agricultural shock. About 17% of India's industry is susceptible to such a farm jolt. These include industries based on food products, beverages, tobacco, oilseeds and cotton.
Not all of India's worries are homegrown though. A severe drought in the US, the worst in 55 years, is projected to cuts American corn and soyabean output, pushing up global prices. India imports these two items for cooking oil and animal feed, which will reflect in domestic prices.
India not only has the lowest credit rating among the four BRIC (Brazil, Russia, India, China) nations, but it is also the only one with a "negative" outlook. Fiscal deficit and lower profits have pulled down public and private sector savings, which could result in lower investment, while raising the current account deficit. This in turn could slow GDP growth.
"For India to grow at 9% overall, agriculture must grow at 4%," says Abhijit Sen, a member of the Planning Commission. Poor monsoons in 2003 (-19%) and 2009 (-22%) had caused farm growth to dip by
-6.6% and rise only slightly by 0.2% respectively against a median of 3.5%.
Many expect prime minister Manmohan Singh, who recently took charge of the finance ministry, to announce a string of reformist measures to steer India out of a web of economic mess — from sharp slowdown to a free-falling rupee and industrial deceleration to rising prices. Investors nonetheless remain hopeful about an economist-prime minister, best remembered for his big reforms he had unveiled as finance minister years ago.
Farms in a fix
Like cricket, agriculture is a glorious game of timing. Delayed rains have hit planting of key crops, even as major food-bowl states are well past their peak sowing period, typically the first fortnight of July.
Paddy saplings, for instance, first need to be grown in small nurseries for 21 days before being transplanted or laid out on watery fields. Without timely rains, they will over-age. Rice planting this year is down by 4%, pulses by 21% and coarse cereals by 27%. Emergency steps, such as setting aside power and diesel for farm operations, will additionally burden the government's finances.
Four states — Karnataka, Maharashtra, Gujarat and Rajasthan — have been the worst hit. In Gujarat, sowing lags 24%.
The country's grain basket, Punjab and Haryana, have assured irrigation networks to fall back on. But 60% of Indian farms have to rely on the monsoon-fed irrigation alone.
This needn't have been this case had irrigation been ramped up. There is a huge difference between irrigation potential created and the actual area irrigated. In the past five years, irrigation facilities could be created only for 10 million hectares, against a target of 16 million. Of these, only 3 million hectares have actually been irrigated.
"Irrigation is still growing. What is not growing is area irrigated," the Planning Commission's Sen said.
There's a huge mismatch, Sen says, between potential created and actual area irrigated. Engineers only consider "potential created" but actual irrigation takes water to flow into every field long after the engineers have left. That often doesn't happen.
Many economists argue that allowing FDI in organised retail could free up supply lines and help farmers get better prices, but fears that this could threaten the livelihood of thousands of middlemen in the supply chain have stalled the reform.
"I get insurance cover, better price and don't have to pay commission that local markets charge," said Tukaram, a farmer in Pune's Narayangaon, who has tied up with an MNC in organised retail.
Yet, India remains hostage to the monsoon because of the rigorous nature of its farming. Temperate-climate nations, for instance, have much less-intensive agriculture and a one-crop season, against India's two. Europe has no crops in winters, when its farmers turn to livestock. Indian farmers have no such luck. They have a billion mouths to feed.
Sen, one of India's best-known economists, sums it up pithily. "No agriculture," he says, "anywhere can work without water. No water in India without the monsoon."
Farmers struggle to keep their kitchen fires burning as rain becomes rare
'Now, everything is in God's hand'
Village: Jehangir, Punjab
One day you have a ripe healthy crop standing before your eyes and when the next morning you wake up, it vanishes — flattened by rains, winds and hail.
'Rab te kise nu Jatt di joone na paave' (a person should not be born into a farmer's family). I commenced paddy transplantation on June 12. With a prayer on my lips and the 'ardas' (prayer) of my wife, I drove the tractor to the field which had been filled to the brim with water. This process, which was over in five days last year, got extended till July 2 this time because not a drop of water fell from the skies.
A canal passes along the edge of my fields but for the last 20-years not a drop has flowed through it, though it is cleaned of weeds every year. I just do not know the reason. I always look to my crop like my own children and rear these accordingly. This year, as of now, I have left everything in the hands
— As told to Harkirat Singh
'I hope I don't have to sell my cattle'
Gopal Rau Jadhav
Village: Sangli, Maharashtra
I have been planting sugarcane for several years. I have never seen such a critical situation in the last 55 years. I have seen droughts but never experienced scarcity of water in my life. We have been searching for drinking water for the past six months. In this situation, I cannot think of watering sugacane. This is a such a crop, which gives me money but it is totally dependent on water. I have not been able to water sugarcane since January.
Every year, I used to get almost 100 tonnes of sugarcane that would give me an income of Rs. 100,000 after making all the payments. I am doubtful whether I will get half of the income this time. Lower production and less weight, will bring down my income by half.
We are seven people in the family and have no other source of income. I had never anticipated this kind of situation. I just hope I do not have to sell my cattle to meet our daily expenses.
— As told to Satyajit Joshi
'I am scared of the unexpected'
Village: Vara-Kawatha, Maharashtra
I had borrowed a Rs. 60,000 loan from self-help groups to cultivate cotton and soyabean on my six-acre land and later Rs. 40,000 from a private moneylender. Both times, the crops either dried up or were washed away. Cotton is the biggest cash crop of Vidarbha and its price virtually decides the fate of 30 lakh families in this highest-cotton-producing state. Over 14,000 cotton growers, mostly from Vidarbha, have committed suicide because of debts and crop failure since 2001.
I did not get a loan from the banks as my husband Sanjay was a defaulter. He committed suicide on August 21, 2008 and I was responsible for repayment of the loan I never knew my husband had taken. I do not know whom to approach for a fresh loan, how to repay the existing one and fund daily expenses of me and my two children.
I am scared of the unexpected. In our villages there are countless stories of farmers suicides, sorry tales of widows like me living under the constant fear of moneylenders
— As told to Pradip Maitra
Answers beyond chasing the rains
We asked three experts to make sense of the season of shock. The bottom line: the economy will come through, but sweeping, new reforms are essential
'Policy should focus on the poorest segment'
Chief economic advisor
The income earned by individuals is fundamental. And even more than that, the per capita income of the bottom segment of population is what we should focus on while crafting policy.
So, just the average per capita income rising in the country, which is happening in India and very rapidly, that in itself is good but not good enough. We must learn to evaluate a nation in terms of how its poorest segment fares. At least for me that is the fundamental focus of policy-making.
It is easy to make policy blunders, whereby you end up helping no one. For instance, some people argue that we should massively tax the corporate sector and divert that money to the poor. Trying to do this in today's world will mean that you will soon see the best companies and skilled human beings leaving the country and then there would be no wealth being generated to be diverted to the poor. And the poor will lose out. So diverting money and resources to the poor, I believe, should be our target, but trying to do that foolishly will mean that you will drive out the rich and hurt the poor.
In India, while per capita income is rising very fast, there are large tracts of poor people. But the good news is that poverty is declining.
Foreign direct investment in retail is just one instrument to modernise the retail sector. You will not only improve the sector in terms of what consumers or farmers are getting but also activate the real estate sector, open up export channels.
Opening up FDI would mean international MNCs will come in. People would ask me, do you think multinational companies are coming to help India?
To me, that's not even a question to ask. Of course, they are not coming to help us, they are coming here for their own profits. We don't realise that in the economic world there are many non-zero sum games. One person's profit can be another person's profit as well.
'Truant monsoons will choke growth engine'
Regional head of research, South Asia
Standard Chartered Bank
It is probably Murphy's law that a deficient monsoon has struck at a time when the economy is buffeted by serious domestic and global headwinds. True, the relatively lower share of agriculture in GDP, better irrigation facilities, improved drought management techniques and availability of buffer food stock could cushion the impact of a drought but it is hard to ignore that the confidence could be badly shaken. Prices of some agro commodities have already started moving up anticipating deficient monsoon, poor sowing, lower yields and in sympathy to global price movements. We would not be surprised to see headline inflation inching up to 8% if El Nino conditions dry up the next two months also.
While inflation risks are obvious, the knock-on effect on growth is also a real worry. The rural consumption story was probably providing a floor to GDP growth as the economy was running on a single engine. Truant monsoons may impede fuel supply to that engine as well. There are some early indications of this in tractor and two-wheeler sales, spreading to even some FMCG items where the consumers will be prone to shift to a cheaper brand. Achieving even 6% growth could be challenging in a drought scenario.
Upside risks to inflation and downside risks to growth — monsoon failure is going to pose further challenges to policymakers. Fiscal space is anyway limited to pump prime and RBI's resolve to stick to its anti-inflationary stance will be tested.
While there is an urgent need to revive investment through long-term structural measures, we fear that precious bandwidth of policymakers might be used up in fire-fighting a monsoon failure.
'Opportunity to usher in policy changes'
National Institute of Public Finance Policy
Drought like conditions in India does not augur well for the Indian economy. As it is growth forecasts for the year 2012-13 has been downgraded by most to around 6%. But of greater concern would be its impact on inflation. Recent data on inflation shows that inflation of most of the food items (except for protein products) have started soaring since early 2012-13. Defieicent rains will only push up prices.
One comfort is that there is huge surplus, more than adequate, of cereals with the Food Corporation of India (FCI). But there are lesser options left in the case of pulses and edibile oil. Global conditions, such as drought in the US and Brazil would mean that despite domestic measures, India could face a situation similar to 2008 where both commodity and fuel prices touched record highs and devastated many economies.
On the fiscal side, deficient rains have dashed hopes of achieving 5.1% deficit target. Poor farm output will put pressure on the governments — both the Centre and the states — to enhance allocation for food, fertiliser, energy, employment and other development programs. The drought-like conditions along with slowing industrial sector, high inflation, and unsustainable fiscal conditions could result in slowest growth since 2002-03. But it could also provide the opportunity for implementing FDI in retail, revamping public delivery mechanism, and other policies that improve productivity in the agricultural sector.