It's not the rain-gods, silly. It's the govt that's failed

Looks like the UPA has exhausted it entire supply of good news in its first term. The latest downer is the India Meteorological Department’s (IMD’s) latest forecast that the monsoon will be “below normal” this year at a time when every sarkari economist worth his salt has been painting an optimistic picture about prices coming down after a good monsoon.

[caption id=“attachment_29387” align=“alignleft” width=“380” caption=“Of the 36 meteorological regions the country has been classified into, 11 have seen deficient rain. Reuters”]  [/caption]

The broad picture is this: after a good and early start, the monsoon has tapered off. Of the 36 meteorological regions the country has been classified into, 11 have seen deficient rain. From expectations of a normal monsoon (96-104% of the long-period average), the IMD has now forecast a below normal range of 90-96%.

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So where does this leave our economic soothsayers?

Everyone - from Finance Minister Pranab Mukherjee to his Chief Economic Advisor Kaushik Basu, to the Chairman of the PM’s Economic Advisory Couuncil C Rangarajan, to the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, and the government’s Chief Statistician TCA Anant - has been talking about inflation control being dependent on the monsoon.

If this is the best our brightest minds can do - pray to the rain gods - we would be better off appointing astrologers as chief economic advisors instead of D-School, U-Penn, Oxford and Cornell alumni and professors.

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But since it is the monsoon’s waywardness that is mesmerising our economists and policy-makers, it’s worth considering whether even in this sphere they are looking at the right numbers.

Here’s what the data shows: India’s problem is not that the monsoons fail once in a while (and so we have to learn to live with Indra’s idiosyncracies), but that there is a long-term trends towards declining precipitation (See chart).

For nearly half a century since the early 1960s, the long-period average (LPA) of rainfall that India receives has been continuously dropping. From a figure of over 935 mm during the June-September monsoon period, it is now just about 880 mm.

Put another way, it means the total rainfall received will keep falling by 5% every half-century, or even more, given the kind of climate changes we have begun to see. This trend calls for a fundamentally different approach to agricultural policy. It needs to go well beyond watching the skies for hope.

Monsoon arrives early, but…

[caption id=“attachment_29379” align=“alignleft” width=“620” caption=“Source: Enam Securities”]  [/caption]

There are five implications of this falling LPA trend:

One, since the total precipitation is dropping steadily, its spatial distribution becomes even more important to predict agricultural output. If the rain falls in irrigated areas rather than the ones dependent on the monsoon, we will have a steeper fall in output than otherwise. If it’s the other way around, the rains will have less of an impact. We thus need policies that can adjust to both scenarios quickly.

Two, given this secular trend in lower and lower 50-year-moving LPAs, policy inputs clearly have to factor in a shift to water conservation: drip irrigation, canal linings, and measures to augment storage and prevent evaporation. These will be critical to the future of agriculture, not to speak of better seeds, fertiliser and pesticides and, maybe, genetically-modified crops that use water like Scrooge does money. Farm automation will have to gather steam, but this is already beginning to happen by default, thanks to rising rural wages with NREGA.

This fact - of a falling LPA - has been ignored by all governments, from Congress to United Front to NDA and now UPA. But since none of the earlier governments was trying to do anything ambitious on the social security front, they didn’t have to face the consequences. The UPA has now changed the goalposts, and hence LPA will come to bite it in the butt.

Three, we will need to manage our buffer stocking and procurement operations better. Last year’s bounty has filled granaries to the brim, and at least 5-10% of it is probably going to go waste since the government is stocking up (and not distributing it) in the expectation that Sonia Gandhi’s National Advisory Council (NAC) will unleash a massive Food Security Act. This Act will up entitlements for both the poor and non-poor. According to BusinessLine, foodgrain stocks have breached the 65-million-tonne mark, and of this nearly six million tonnes are being stored in the open. Any bets how much will be eaten by rats or destroyed by rain?

Four, massive buffer stocking will raise the actual cost of the grain (and its subsidy), since storage has its own economics (you have to pay for godowns, electricity, transport to ration shops, security guards, etc). Storing all the grain you need is actually a horrendously expensive way of dealing with future requirements. We need better answers.

The Food Corporation of India thus needs to operate in the forward markets abroad to both sell and buy grain (depending on seasonal requirements), so that a part of the stock is always on the high seas, and can be exported or imported through any port - and closer to where it is needed. Grain needed in Kerala or Orissa can be unloaded from ships directly at Kochi or Paradeep, instead of rushing stocks from Punjab or Western UP by train.

This will reduce storage costs, while always making grain available where it is needed. But it needs superior inventory management skills, which is in short supply among government babus.

Fifth, matching the NAC’s political diktat of providing 75% of the population with cheap grain (Rs 2 for wheat, Rs 3 for rice) with the economic imperative of not letting the fiscal deficit (the gap between revenues and proposed expenditure which needs to be met by borrowing) go out of control, will call for extraordinary reformist courage. This has been in severe short supply in both UPA-1 and UPA-2. In a year of slowing growth, macroeconomic management holds the key to inflation.

Unless the UPA pulls up its socks, its future is waterlogged, no matter how the rest of the monsoon shapes up this year.