When we think about the impact of the monsoon on the Indian economy, we are trying to effectively gauge the risk of drought (10% less than the 89cm long-period average). Evidence suggests that the Indian economy today is drought resilient but not drought proof. The distinction being that once drought-proof there is no negative impact on the economy, but in a drought-resilient country, there is a negative but manageable impact. This shift has steadily taken place over the last 40 years as the rabi, or winter crop, output has become of equal significance to the kharif, or summer crop, harvest. For the first time in FY2012, the rabi crop output surpassed the kharif output (out of total foodgrain production of 257 million tonnes, 124 million tonnes was from kharif and 133 million tonnes from rabi). In fiscal 2013, the rabi output might neutralize the damage to the kharif crop by the deficit monsoon in 2012.
Second, due to efforts by various governments in the last 50 years, farmers’ drought resilience has increased. Maharashtra is a case in point. Since the formation of the state in 1960, maximum values for food production have been increasing; the minimum values in drought years have also risen. This pattern is more or less repeated across the country.
Third, in rural areas, non-farm income is increasingly supplementing farm income. And fourth, agriculture’s share of gross domestic product (GDP) has also shrunk, from 50% in the 1950s to about 12-15% today. This implies that the country has the capacity to buy its way out of trouble.
But drought resilience is very expensive and has its limit. If for argument’s sake we look at food production as the only monsoon impact on the economy, its strength still has direct bearing. On average in an excess monsoon year (10% more than the 89cm long-period average), food production jumps by 15%; in a normal year it grows by about 4.4% and, in a drought year falls by 7%. Food production as a measure of the monsoon’s impact is skewed because it does not consider the cost of energy used to produce that food. The monsoon affects both the demand and the supply side of energy. Approximately 30% of India’s total power output is used for irrigation. About 19% of India’s total diesel usage is for agriculture. Haryana is an example. It is expecting a bumper paddy crop in 2012 (where the state’s monsoon rain deficit was 39%). Its electrical utilities are in a very poor financial state. This yield has been achieved by providing subsidized power to exploit ground water to substitute the rain deficit in 2012. Punjab and Tamil Nadu are major foodgrain producers, where electricity is free for farmers, and the erratic 2012 monsoon has severely compromised the state electrical utilities’ ability to pay generators. So fewer investors and bankers are investing in the power sector.
Since the state has less financial resources, it resorts to power cuts hitting urban, industrial and even agricultural consumers, who then shift to diesel. In drought years, diesel demands shoots up by an average of anywhere between 5-7%, pushing up the diesel subsidy bill (currently running at Rs.1 trillion: crude oil accounts for 30-35% of India’s total imports). India is rapidly urbanizing, and air conditioning and industrial needs are competing with agricultural requirements. The year 2009 witnessed a mega drought, and the price of power in the grid shot up to about Rs.19 per unit from a yearly average of Rs.4/unit. In 2012, a monsoon-deficit year, price of power shot to about Rs.9 per unit from a yearly average of Rs.4/unit.
Economists need to start calculating the impact of the monsoon on the economy using an index of food production and cost of energy as opposed to just agriculture GDP. I think the impact is deeper than we think.
In the coming years, the monsoon is not going to support our creaky food, energy and water construct. The monsoon works in 30-year patterns, i.e., three decades of higher frequency of excess rain followed by three decades of high frequency of droughts. In 1985, India was supposed to enter into a period of three decades of excess rain. That has not happened. The 30-year pattern seems to have extended to 60 years. The last excess monsoon was 19 years ago (1994). Between 1900 and 2000, there was an average one drought per decade. Between 2000 and 2012 there have been three droughts (2002, 2004, 2009) and one deficit year (2012). Climate experts predict that there will be a higher frequency of droughts in India till about 2040.
Over the past 12 years, food production growth has averaged about 3%. In the last decade, India’s population has grown at a yearly pace of about 1.5%. Demand for electrical energy is growing at a compounded annual growth rate of 7/8% per annum, diesel consumption is growing by another 7/8% per annum. But between 2000 and 2010 accumulated rainfall was below the long-term average by 6%. This trend is probably being reflected in volatile food prices, and sharply rising energy costs. While making bets and policy on food and energy over the next decade or so, businesses and governments need to account for the monsoon on the conservative side.
As for 2013, there is an 80% chance of a near-normal monsoon, and a very low chance of either excess rain or drought because this is an Enso-neutral year. Enso, or El Nino Southern Oscillation (ENSO), refers to a phenomenon where the waters off the coast of Peru either remain neutral or warm. El Nino correlates well with drought in India.
Jatin Singh is the founder of SkyMet Weather Services, a private weather forecast company.