If India’s economic growth had not fallen, interest rates were not as high, food inflation was not uncomfortable and the rupee had stood up against the dollar, a recalcitrant south-west monsoon may not have got so much attention.
Stock markets, in fact, had stopped giving much importance to the monsoon because it did not affect most of the market bellwethers. But as a pile of negatives have built up, a bad monsoon may be another nail in the coffin. It could stoke food inflation, hit rural consumption, and government finances may get stretched further if they tread the farm bailout path.
Monday’s inflation data illustrates this dilemma. The Wholesale Price Index rose 7.25% in June, lower than May’s 7.55% figure. But inflation in primary articles remains stubbornly high at 10.5%, with food inflation leading the way at 10.8%.
And food inflation is not being driven by staples such as rice, wheat or cereals, but by protein-rich foods such as pulses, vegetables, eggs, meat and fish. Rising food inflation is overshadowing the good news that core inflation, or inflation in non-food manufactured products, is stable, though not falling as the Reserve Bank of India would have liked.
The monsoon adds another dimension of risk to the situation. The latest weekly update saw rainfall up 1% over the long-period average in the week ended 11 July, but cumulative rainfall measured from 1 June shows the monsoon as being 22% below the long-period average.
What’s the historical record? In 2009, when the monsoon was below average, rainfall in June was 47.2% below average, 4.3% below average in July, 26.5% in August, and ended the season (June-September) with a deficit of 21.8%. In 2002, another bad year, rainfall was 9.4% below average in June, down 54.2% in July and 1.7% in August, to end the season down 19.2%. In 2002-03, the deficit saw an 8.1% fall in agricultural production, while in 2009-10, it grew by 0.4%, helped by a low base effect.
If the season ends with deficient rainfall, then the risks of a poor crop and rising food prices become higher. The fear is this could hurt rural consumption. Tractor sales have slowed since the third quarter of 2011-12 due to weakness in farm output. Rising food inflation may have further hit rural disposable income, which may be one reason for weakness in two-wheeler sales as well.
But consumer non-durable firms say they are not seeing a weakness in rural demand. “We don’t see any slowdown, urban or rural,” was the response of Adi Godrej, chairman of Godrej Consumer Products Ltd, to a question on whether there was a slowdown in demand. Saugata Gupta, chief executive (consumer products) at Marico Ltd, also says rural consumption is not seeing any pressures as of now due to risks to farm income growth. But his concern is if slow growth combines with lower agricultural production, and inflation is added to this mix, rural consumption may see some pressures building up.
How the government reacts to a poor monsoon could determine rural consumption. The rural employment guarantee scheme is meant to provide a hedge at precisely such times, and its inflation-linked wages may provide some relief. There is also the matter of income from non-agricultural activities, but poor industrial growth is a threat to this avenue of income.
Unfortunately, for the government, it does not have the fiscal flexibility it had in 2009-10, when the manufacturing sector grew 8.8%, or in 2002-03, when it grew 6.8%, in contrast with the current slowdown in industrial growth. Political compulsions may see the government still reach out to its rural vote bank with a number of sops, an action that may see a bad fiscal situation turn worse.
A clearer picture of the likely agricultural shortfall will be available by mid-August, but it is clear that in addition to the slowdown in exports, the fall of the rupee, the political paralysis and the investment drought, a new risk is rising.
High inflation and a high fiscal deficit will mean monetary policy will continue to be tight. The net result will be that the downturn will get more prolonged.
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