Raining on Modi’s parade?

Weatherman’s Prophecy: The monsoon forecast is of delayed, uneven and below normal rains

The markets have been euphoric as the NDA has come back to power with a resounding majority. People belonging to various sections are hoping for better days ahead. But with declining world trade, a subdued trend in exports, the investment climate still stuck in the IBC (Insolvency and Bankruptcy Code) resolution process, virtually no additional fiscal space left for increasing public expenditure, the only engine of growth is private consumption. Thus, accelerating growth and improving employment is going to be a formidable challenge for the new government. In this environment, the fortunes of people living in the rural areas, constituting 58% of the country’s population, rests on the hopes of a better monsoon.

The Indian Meteorological Department has forecast a normal monsoon at 96% of the long period average (LPA) of 89 cm, with a model error of +/- 5%, which should bring some cheer to the farmers. However, there is considerable apprehension after the experience of last year when there was a 9% rain shortfall from the 97% predicted by the IMD. On the other hand, the private weather forecaster Skymet predicts a below normal monsoon this year at 93% of the long period average. There are also concerns about the uneven regional spread as well. According to the IMD, Northwest and Northeast India are likely to receive 94% and 91% of the LPA, Central India and the Southern peninsula are supposed to receive 100% and 97% respectively. In contrast, Skymet predicts the highest rainfall for the Southern peninsula at 95%, followed by East and Northeast (92%), Central and Northwest India (91%).

Although the contribution of the agricultural sector to the country’s GDP is just about 16%, its macroeconomic and distributive implications are far more serious. The sector provides direct employment to almost 44% of the people and supports the 58% of the population living in the rural areas. The sector is already facing distress. Large parts of the country are facing drought conditions. The farm products do not get remunerative prices. There has been a steady worsening of the terms of trade between agricultural and non-agricultural sectors. In 2018-19, food inflation averaged 0.7% as against the non-food inflation rate of 5.5%. The employment figures for 2017-18, finally released on May 31, show that the unemployment rate among the youth (15 to 29 years) rose sharply over the decade from 2007-08 and in 2017-18, it included 17.4% of rural men and 4.8% of rural women. In this environment, a below normal monsoon is the last thing that the farmers, as well as the new government, would like to face.

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The implications of a subnormal monsoon are not confined to the farm sector. It has significant macroeconomic implications. Although agriculture itself accounts for only 15% of the Gross Value Added (GVA), the agro-processing industries are important as they contribute to 8.8% of the GVA in industry and 8.4% of GVA in agriculture.

Exports of agricultural products constitute 11.7% of the total exports. Besides, these industries account for 11.6% of the employment. Thus, there will be significant effects of a subnormal monsoon in terms of adversely impacting on agricultural production, industrial output, exports as well as employment.

Although the prices of farm products have continued to be depressed, the recent trends show some surge. The depressed food prices were primarily responsible for the inflation rate being at well below 4%. In fact, the core inflation (excluding food and fuel items) in January and February were 5.5% and 6% respectively. In the prevailing environment in which the capacity utilization, as well as the real interest rates, are very high, a reduction in the policy rate is important to revive the investment climate. But a poor monsoon, with its uneven spread – both time and region-wise, can lead to a surge in food prices and force the Reserve Bank of India’s Monetary Policy Committee to hold the policy rate.

Of course, it is widely expected that in the June meeting of the Committee, we will see a reduction in the policy rate by 25 basis points if not more. But going forward, a tight monetary policy stance combined with an austere fiscal policy when the economy is in a slowdown mode could only intensify the problems.

It is by now well acknowledged that the farm distress in the country is real and the hopes of reviving the fortunes of the farmers crucially depends on a better monsoon this year. Considering this, it is important for the newly elected government to embark on a slew of reforms in the agricultural sector without losing time. The most important is the expansion and deepening of the crop insurance scheme – the Pradhan Mantri Fasal Bima Yojana. It is necessary to cover more crops and penetrate more regions. This should be done on a war footing and the final budget should increase in the outlay from the Rs 14,000 crore estimated in the interim budget.

The time is also opportune to embark on broader reform in the farm sector. There is clearly a need to make a shift from consumer to producer orientation. This implies that the government will have to take measures to reverse the worsening terms of trade in the agricultural sector, now heavily loaded against the farmer to ensure that the consumer enjoys low prices.

Frequent changes in trade policy must be avoided and quick exporting of surplus production should be facilitated. Distorting policies such as enforcing stock-holding limits and frequent export bans should be corrected. Repeal of the Essential Commodities Act and breaking the monopsony of the Agricultural Produce Marketing Committees (APMC) over farm produce, too, are important. In fact, a policy focus on enhancing investment in storage, processing and marketing and timely information on both input and output prices to the farmers would help them to enhance their yield and prices.

The government begins its new innings coinciding with the monsoon season and it does not have much of a lead time. It should get down to the business of preparing itself for the expected subnormal monsoon. Hopefully, the euphoria of the unprecedented mandate will push the administration into top gear quickly and provide it enough momentum to tackle the formidable task.

(The writer was a member of the Fourteenth Finance Commission. Presently, he is a Counsellor, Takshashila Institution)