Millennium Post

Can El Namo offset El Nino?

Euphoria for Modi-led government can still be seen in the markets. According to ever-blabbering experts, Narendra Damodar Modi victory has rekindled the animal spirits which have long been subdued in UPA-2 regime. But god of rains does not seem much amused. Indian Meteorogical Department has predicted a below-average or 7 per cent deficit of Monsoon this year because of possible El Nino effect, a phenomenon which leads to warming of the sea surface of the Pacific ocean. The forecast is turning out to be true with June rains recording one of the worst performances since 1901. There was a 43 per cent deficit in monsoon in June, which is the lowest since drought of 2009 in ‘Manmohan Singh-led’ government. And western India is dreaded to be worst affected by the sub-normal monsoon.

Although agriculture sector only contributes close to 16 per cent to our GDP growth, about  half of India’s workforce is still dependent on agriculture, hence weak monsoon is bound to have serious economic implications.

Inflationary pressure
Though inflation rose steadily in UPA era, its second innings witnessed price level running into double digits with two droughts mauling the agriculture growth and fuelling supply-side constraints. But with last year’s abundant production, things were seemingly fine this year until the MET department prediction. Mere speculations have driven up onion and potato prices yet again, this time under ‘Modi-government’. And, onion prices have always played an important role in preparing the report card of any government. Ajay Jakhar, chairman of Bharat Krishak Samaj says, ‘The rising prices of onions and potatoes in markets currently are mainly due to speculation. The commodities present in the market are stock supply. If by September, it becomes clear that monsoon has failed, prices will considerably rise after October.’

On the issue, economist and National Institute of Public Finance and Policy professor Ajay Shah mentions, ‘Inflation in India has been high from February 2006 onwards. It’s hard to say that over this entire period, there have been droughts. We have to look deeper on the causes of inflation.’
Onion prices have risen 80 per cent in June at the Lasalgaon APMC market in Maharashtra.  While Modi government has acted swiftly to check the prices and clamp down on hoarders of onions and potatoes by putting them under Essential Commodities Act, 1955, which allows states to prosecute anyone who holds stocks of these two commodities beyond the state-specified limit. Our new government also reintroduced minimum export price (MEP) barely three months after UPA government abolished it. Within a matter of days, it raised MEP to $500 per tonne from $300 a tonne. Coming to wheat and rice crops availability, which are expected to strike a bumper production this time. According to revised estimates of government, rice production is estimated at record 106.29 million tonnes (mt) and wheat production is expected to reach 95.85 mt.

Ashok Gulati, former chairman of Commission for Agricultural Costs and Prices (CACP) says: ‘The deficient monsoon can be a blessing in disguise this time for the record stock we have for rice and wheat rather than leaving them to decay.’ Gulati added, ‘To break the monopoly of hoarders and black marketers, import policy will have to be adopted by the government. And the extent to which monsoon deficit will affect food inflation depends on how well prepared Modi-government will be to cope with it.’

On government’s recent spate of measures to crack down on hoarders, Ajay Jakhar says: ‘ These are knee-jerk reactions of central government. On a long-term basis, we need a proper formulated policy to combat inflation. The farmers are getting lower prices for their products which are sold at higher prices to consumers. Where is the money going? Since agriculture is a state subject, central government has to rope in state counterparts to tackle this menace.’ Sub-normal rains would upset production of not just onions and potatoes (as people are found to be more concerned
by their prices) the production of crops including paddy, groundnut, bajri, tur and cotton would remain subdued.

GDP growth rate
With two consecutive years of sub 5 per cent growth, market is pinning hope on Modi-govt to give fresh lease of life to the economy. While World Bank has projected a 5.5 per cent growth for India in
FY15, for the next fiscal, FY16, it is estimated to be around 6.3 per cent. Agriculture sector last year showed an impressive growth of 4.9 per cent. Though it contributed only 14 per cent to the overall Gross Domestic Product (GDP) growth rate in 2013-14, possibility of poor monsoon this time could negatively impact rural economy hampering their purchasing power. In the drought of 2009, agricultural growth remained flat, but good show put up by manufacturing and service sector drove GDP growth to 8 per cent. But a healthy growth in agricultural sector is always reflected in flourishing rural economy which gets converted into FMCG and automobile segment growth. ‘A bad monsoon period would impact the overall economy growth rate, but the negative impact would be smaller than what it used to be when (say) agriculture was 28 per cent of GDP, says Ajay Shah. 

National Statistical Commission chairman and former chief statistician of India Dr Pronab Sen says: ‘The droughts of 2009 and 2011 were coincided with global crisis affecting our economy. If our manufacturing and service sectors do well, then I do not think poor monsoon would have any impact on our GDP growth rate, given the fact that the bottlenecks in the industrial sector are cleared gradually. But yes, there might be no contribution from agricultural sector this time.’
Echoing Sen’s opinion, Gulati says: ‘Agricultural growth cannot only be the determinant of GDP growth. It contributed only 14 per cent to GDP last year. People are upbeat about Modi-government which is reflecting in our stock markets. Good execution by manufacturing and service sector would help compensate everything.’

The ghost of high fiscal deficit haunted our previous Finance Minister P Chidamabaram. He vowed to contain it at 4.6 per cent of GDP and called it a ‘red line that would not be crossed’. The same ghost is here to scare our novice Finance Minister Arun Jaitley.

We have even heard him promoting ‘fiscal prudence’ over ‘mindless populism’. But catering to the need of drought hit poor farmer cannot be termed as ‘mindless populism’. Hence, relief measures will have to be given to nature callousness hit farmers. Pronab Sen says, ‘ Poor rains will surely affect the fiscal deficit target of the economy. Government will have to shell out more as MGNREGA payments, loan waiver and many more relief measures. A higher subsidy payout would mean higher deficit.’ ‘Low GDP growth generally means low growth of tax revenues. If expenses are not kept in check, then this would give a bigger deficit,’ says Ajay Shah. A situation like this is not something unusual. But what is atypical this time is hope and  boundless expectations people have from Modi. ‘A man who has the Midas touch.’ It remains to be seen how he prepares himself to get out of this nature-induced maze.
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