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Rate cut and a prayer

The sight of a skeleton thin farmer sitting over parched, cracked, white hot land is familiar to many Indian newspaper readers. Every year when the rain gods curse the farmers with too little rain, the same stereotypical image is taken out and rehashed to indicate a drought. It is perhaps lazy coverage like this which makes several veteran journalists like P. Sainath angry. To many in the media, P.Sainath is the quintessential rural affairs journalist who is so angry he cannot move. Bound tightly with tension and anger, he approaches the state of rigor mortis. Except that this would not be even remotely true. There is much justification in the despair that the state of the rural poor evinces.  
In Everybody Loves a Good Drought, Sainath talks about the amount of rainfall, total productivity, percentage of people with access to water, percentage of land irrigated, the number of acres owned, the amount borrowed from banks, amount borrowed from others and the amount owed at 120 percent interest. If all of these agriculture-related macro variables seem mind-boggling, then let us simplify this further. When a drought hits a farmer’s life is wrecked. All these variables cease to matter and then there on it is a race for survival. India on Tuesday ominously cut this year’s monsoon forecast to a starkly low 88 percent of the long-term average, prompted by an oncoming El Nino weather pattern. This has raised significant fears that the first drought in nearly six years may soon become a reality. This is in a country where nearly half of farmland lacks irrigation.

Although agriculture accounts for just about 15 percent of the nearly double trillion worth Indian economy, three-fifths of India’s population of more than 1.2 billion depend on farming for their livelihood. In other words if and when a drought hits this year nearly seventy percent of India’s working population will come under considerable duress. The arrival of the June-September rains has been already delayed by about five days, worrying both the farmers and the present ruling dispensation which is battling a massive rural slowdown. The oncoming monsoon induced drought could also possibly affect and impact India’s economy in more ways than one. The Reserve Bank of India (RBI) also adjusted its estimation for inflation saying poor monsoon and higher global commodity prices could put a reasonably intense upside pressure on inflation. According to the RBI, assuming reasonable food management, inflation is expected to be pulled down by base effects till August but will start rising thereafter. 

Inflation, as measured by the consumer price index (CPI), stood at 4.87 percent (year-on-year) in April. Given this the argument for a rate cut does not make much sense. While market analysts and armchair experts pontificate about how inflation may remain subdued, one must go back to first principles and analyse what the likely effect of a drought could be on the CPI. Given that there is an empirical link between food scarcity and the resulting inflation in food prices, it remains unlikely that the current levels of inflation will remain subdued for long. One does hope that the rain gods have mercy. A drought will delay sowing, raise the farmer’s irrigation costs and could blight standing crops. All of these are events that India’s farmers and the economy would hope to avoid.
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