Don’t underestimate the drought

In a scenario of economic gloom, it is easy for a government to forget other symptoms of stress in the country. The drought-like condition prevailing across India is one such signal. From an early denial to hope later, the government seems to have finally woken up to the reality that this year may also be a drought year. Coming after the last severe drought of 2009-10, this may not be the most favourable news for an embattled government. The 2009-10 drought was severe, but did not have much impact on the core economic indicators. So much so that share of agriculture in the national output did not decline even though it was the second worst episode since independence. Compare this with the previous drought of 2002-03 when the gross domestic product (GDP) for agriculture declined by a whopping 6.6%. But this does not imply that the drought did not have any impact on agricultural output. The reason that output growth was positive was due to the low base-year effect: the previous year 2008-09 was also a bad one for agriculture with output declining by 0.15%. The somewhat better performance of the rabi crop helped a bit.

The fact that the drought of 2009 did not have any significant impact on either growth or on the livelihood of the poorer sections is not just a statistical artefact, but is also supported by the conditions prevailing immediately before the drought. Even though inflation was a significant factor then—it was hovering in double digit for most of 2008 and 2009—it is also true that the recession of 2008 also restrained prices of manufactured products; inflation was accompanied by a significant movement of terms of trade in favour of agriculture. Secondly, the 66th round Employment-Unemployment Survey also showed casual real wage rates growing at 4% per annum for rural males and 5% for rural females between 2005 and 2010, suggesting that those most vulnerable to inflation were much better protected. The third defining feature of the 2004-05 to 2009-10 period was the increase in social sector spending by the states as well as the Union government. For example, 66th round shows an eight-fold increase in participation in public works over the 61st round and a doubling even compared with the 64th round. This was also evident in case of the public distribution system (PDS) where many state governments introduced various reforms measures including reduction of prices of cereals.

More generally, the effects of the fiscal stimulus, which involved a significant step-up in construction activity in the public sector and in rural areas, meant that sufficient non-farm avenues were in place for those vulnerable to the drought. In addition, low input prices and the subsequent debt-relief for farmers mitigated some of the stress. The significant flow of resources in rural areas in the run up to the general election in 2009 meant that external shocks did not impart a severe blow as to create a situation of sustained distress.

The situation today is substantially different. Not only has growth slowed, inflation continues to remain a worry. The ballooning fiscal deficit means that the ability of the government to undertake re-distributive transfers is limited. So much so that allocations of existing social safety nets such as the Mahatma Gandhi National Rural Employment Guarantee Scheme has already been reduced drastically. But far more worrisome is the fact that input prices; particularly labour cost, fertilizer cost and irrigation costs have increased by almost 40% during the same period. Of these, the most dramatic increase has been in fertilizer costs after the introduction of nutrient-based subsidy regime. The stress on farmers’ income was already visible even without the drought. Finally, international conditions also seem rather unfavourable with drought in the US turning out to be severe with expected output decline for most crops including corn. The fear of spike in food price inflation in the international market is back on the radar.

Needless to say, the effect on growth is of little concern in this kind of situation. However, even with the reduced share of agriculture in the total GDP, the fact that last year was a good year means that it is unlikely that agricultural GDP will not decline substantially. While it may not pull down the aggregate GDP growth rate greatly, far more important is the fact that this will hit the large majority of farmers and agricultural labourers who are already struggling with rising input prices and slowing growth. This may have a cascading effect on other sectors if the contraction in demand in rural areas also spills over to other sectors.

However, in the middle of this gloom is also the silver lining of the massive food stocks. It is rare that an opportunity emerges to convert the misdeeds of the past into good fortune for the present. If there is any time that one should celebrate the 82 million tonnes of foodgrain lying in government warehouses, surely it is this. This may be the best time to offload the stocks in the market either through the open market sales route or through PDS. This is also the most opportune moment to get the National Food Security law enacted and implemented. But a word of caution is needed here: given its track record, this government is unlikely to use the food stocks to cushion the rural population suffering from the twin problems of drought and inflation.

Himanshu at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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