10 things to expect now that drought is a reality

By Madan Sabnavis

One area which we always take for granted is agriculture. We work on the basis that farm growth will always be at a reassuring rate. We also make bold assumptions that the monsoon will be normal and stick to this stance till mid-way through the rainy season, when we realise the deficiency is some pockets. Even today, notwithstanding the fact that a drought has been declared, we take solace in the fact that the rains will be near normal in August.

Does this stance really help, considering that by the time we wake up to the crisis our options are limited. It is important that we should not be in a state of denial as there will be hardship in all aspects of the economy going ahead. Let us see how the story will unravel.

First, will the overall growth of the economy be affected? The answer is yes, for two reasons. The first is that even though agriculture has a relatively small share of 14 percent in GDP, zero or negative growth will push back the incomes of a large segment of the workforce and affect their livelihood. Lower income means less consumption of non-farm products which, in turn, affects demand for industry and hence industrial growth, too.

One should remember that the harvest season from October onwards also coincides with the festival season, when rural spending picks up. Therefore, the indirect impact is significant. The other reason why this is important is that at a time when the economy is crawling, with growth expected to be below 6.5 percent of last year, any reduction in growth, of howsoever a small magnitude, will diminish prospects further. We desperately required growth of 3-4 percent here to add around half percent growth to an already dismal number expected this year.

[caption id=“attachment_416344” align=“alignleft” width=“380”] Historically, every drought year is followed by good harvests, and we forget these sordid stories until the next cycle of drought. Can we hope for a different reaction this time? AFP[/caption]

Second, what happens to food inflation? One view is that we have surplus food stocks in the granaries and, therefore, prices will be under control. But it is only rice and wheat where we have stocks. In the case of coarse cereals, pulses and oilseeds, there is no such buffer. Therefore, any shortfall in output will lead to an increase in prices. And there will be little comfort in saying that we have stocks of rice and wheat as people consume other commodities, too, which will be under pressure.

In fact, one outcome of a drought is the loss of fodder, which together with the higher price of animal feed such as oil cakes, maize, etc, will push up prices of dairy and poultry prices that are already pressured. Therefore, all hopes of inflation coming down will get dimmed as the exact effect unravels by October.

Third, loss of revenue for farmers due to the drought will lead to greater pressure on the government to provide alternatives. Here, the NREGA programme will play an important role and there could be a tendency for more money to be spent on this scheme as it will have to be expanded to provide solace to farm labour. Therefore, the government will have to be a bit more liberal on its budget as drought relief - through more employment programmes or debt waivers - would be a part of the package.

While one could be critical of NREGA all these years, the important thing is that we at least have a structure for implementing this programme and would not have to start creating one now. What can only be hoped is that NREGA is made more meaningful and the labour is used for enhancing the productivity of land so that there could be medium term gains in future.

Fourth, the issue of urban migration becomes imminent as was seen in the past whenever we have been afflicted by droughts. With farming becoming progressively risky and nearly 65-70 percent of our cultivation being rainfed, migration to urban areas makes a lot of sense as incomes are more assured. Besides, droughts invariably increase the indebtedness of the affected, which provokes such movement. This has, in the past, also led to shortage of labour, especially during harvest time, which, in turn, has pushed up wages. The impact will be felt more in future years where there will be fewer hands available at the time of sowing or harvesting.

Fifth, the government has to act in advance and import pulses and edible oils. India, given its size, is one of the largest producers and consumers of all farm products. Any shortfall in production invariably sends global signals which are picked up fast and feed back into market prices. Further, given that there are similar conditions in the US, the wheat, corn and soybean crops are likely to be affected, imposing an upward pressure on prices. In the past we have seen that India had to import wheat (2007) and sugar (2009) at progressively higher prices once we had reached the edge. This has to start immediately in a phased manner.

Sixth, the government will have to think harder about going through with certain policies like, say, freeing of diesel prices. While it is true that the farm sector accounts for around 10-15 percent of total diesel consumption, with the potential indirect impact of adding heavily to inflation (a back-of-the-envelope calculation is that, with a weight of 4.78 percent, a 10 percent increase in prices will add direct inflation of 0.48 percent and another 0.48 percent indirectly through transport costs). This is a tough call at this time. We do not have presently a system in place that can target diesel users and charge market prices from non-farmers.

Seventh, the RBI policy stance would logically remain intransigent given that inflation is high and inflationary expectations are running in an upward direction. With this number unlikely to come down with food inflation being the major concern, industry will have to be prepared to face higher rates for some more time.

Eight, fiscal discipline will have to be given a go-by once more - not to say that it was likely to be within the targeted range. The government perforce will have to look towards expanding its expenditure on drought relief. Future budgets will have to take into account farm debt relief and interest subventions too.

Nine, the longstanding amendment required for the Forward Contract Regulation Act (FCRA) will be kept in abeyance again, and futures trading will again be in jeopardy. In the past, any increase in prices of products traded on futures exchanges came under a ‘ban’. Hopefully, with the air being cleared on the absence of such a causal linkage, bans may be skipped this time. But, reforms in this area, which are required through the FCRA, are unlikely to go through this time.

Ten and Last, going by past experience of droughts, will we learn our lessons? The answer is no. We do need to get back to the Green Revolution and work on increasing productivity, land under cultivation, use of superior seeds (GM?), creation of irrigation facilities, enhanced storage facilities, improvement in transport and packaging and marketing (changes in APMC laws). We keep talking, but have done little to change the status quo. Historically, every drought year is followed by good harvests, and we forget these sordid stories until the next cycle of drought. Can we hope for a different reaction this time?

The author is Chief Economist, CARE Ratings. Views are personal