Crisis looms as monsoon continues to falter

New Delhi/Bangalore: Even as the monsoon failed to pick up and retail inflation continued to hover in double digits, some affected states such as Karnataka have already begun requesting the Union government for fiscal assistance.

If the contagion stemming from a monsoon deficit spreads, a fiscally strapped Union government may find it difficult to provide the resources—something that is considered as a big risk by multilateral agencies.

According to data released on Wednesday, the rain deficit for India stood at 22% to date, and retail inflation for June touched 10.02%. Regionally, the rain deficit story was most severe in north-west India (39%), central India (26%) and the Southern Peninsula (23%).

A concerned government, still loath to term the deficit a drought, is mounting a rearguard action, especially to contain inflationary pressures.

Watch Video

With Karnataka asking for a relief package after poor monsoons, fiscal pressure on the government could rise. Economist Kunal K. Kundu and Mint’s Asit Ranjan Mishra discuss the situation.

Loading video

The worst-affected states are seeing a shortage of fodder, and if this hits milk supply, food inflation could get worse. Agriculture minister Sharad Pawar informed the consultative committee of Parliament that he has directed the animal husbandry, dairying and fisheries department to make modifications in various schemes to impart greater focus on fodder production; he has also directed institutions under the Indian Council of Agricultural Research to fast-track their research programmes relating to feed and fodder.

Separately, food minister K.V. Thomas on Wednesday said the government would consider imposing stockholding limits on food items such as pulses and cooking oil to check hoarding and rein in prices. The minister said the government is monitoring the price situation on a daily basis and is also in touch with the state governments.

The government had withdrawn stockholding limits on a number of food items on the back of bumper production. Thomas noted that the government is not concerned over prices of foodgrains and sugar because of production outstripping demand, but is “worried” about pulses, whose output may drop due to a poor monsoon so far this year.

He said the government is considering restarting its scheme to sell subsidized pulses through ration shops. The subsidy of Rs 10 per kg on pulses may also be increased.

A two-hour-long meeting on food security headed by Prime Minister Manmohan Singh on Wednesday evening that was attended by Pawar, defence minister A.K. Antony, home minister P. Chidambaram, Thomas, chairman of the Prime Minister’s economic advisory council C. Rangarajan and Planning Commission deputy chairman Montek Singh Ahluwalia discussed the monsoon situation, the food security Bill and steps to check food prices.

“On the monsoon, the ministers were of the view that we should wait for 11-15 days more to get a clearer picture about the situation,” one of the ministers who attended said on condition of anonymity. “We have already discussed several measures, including distribution of pulses at a subsidized rate to the below poverty line families, controlling the foodgrain export and imposing stock limits on food commodities. A final decision will be taken at the next meeting.”

Experts fear that the current macroeconomic circumstances make the impact of a poor monsoon particularly difficult for the economy to absorb.

D.K. Srivastava, director of the Madras School of Economics, said the rainfall deficit is widespread. “It appears it will have considerable adverse impact on agricultural output. It will significantly increase supply-side constraints, which will negatively affect both growth and inflation,” he said.

Srivastava pointed out that the peak sowing season of July has all but passed, something that could potentially impact the next harvest.

Separately, data released by the Central Statistics Office showed retail inflation stood at 10.02% in June, falling marginally from 10.36% a month ago, even as retail food inflation hardened to 10.71%.

Srivastava said there could be increased demand for the government’s rural job guarantee scheme, and both this and the demand for succour from states could put more pressure on government finances.

Arguing similarly, N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy economic think tank, said a drought-like situation could lead to further growth deceleration, job loss in farm and non-farm activities and increase the subsidy burden of the government. He, too, said there would be more takers for the job guarantee scheme.

“Though there might not be requirement for additional allocation under the scheme, there may not be any unspent money with the government on this account like it was happening in the last few years,” Bhanumurthy said.

The government has allocated Rs 33,000 crore for the Mahatma Gandhi National Rural Employment Guarantee Scheme for the current fiscal.

Srivastava said the government should assess its food stock and quickly anticipate demand for pulses and edible oils. By importing such items in time, it could keep the crisis under control without risking significant additional fiscal cost, he added.

Meanwhile, Karnataka, facing its worst monsoon in 42 years, has sought Rs 2,000 crore in drought assistance from the Centre to mitigate the situation.

The crisis-hit southern state recorded a 43% deficit in rainfall between 1 June and 15 July, the lowest rainfall recorded in the period in 42 years, the latest weekly report of the Karnataka State Natural Disaster Monitoring Centre (KSNDMC) showed.

Of the 30 districts in Karnataka, 12 recorded a rainfall deficit of 60-99% and another 16 faced a 20-59% shortfall, according to the report. Rainfall deficit or surplus is measured based on historical average rainfall data for the 1951-2000 period.

“It will be difficult to make up this deficit in the remaining time,” KSNDMC director V.S. Prakash said.

Officials in the chief minister’s office said they were facing a shortage of drinking water and fodder, and people were migrating to other states in search of jobs.

In neighbouring Maharashtra, the districts of Pune, Sangli and Satara (some talukas, or sub-districts), Osmanabad and Jalna have received rain between 25% and 50% of average, said agriculture commissioner Umakant Dangat.

“Due to deficient and late monsoon, we are now trying to concentrate on salvaging the situation during rabi (the winter crop, the one after the current kharif crop) season and (giving) aid worth Rs 300 crore by way of fertilizers and seeds, if farmers are forced to resow,” Dangat said.

A bumper harvest of foodgrains at 257.44 million tonnes (mt), up 5.17% from a year ago, in the just concluded 2011-12 crop year is not dampening price expectations.

Spot prices of wheat are ruling at Rs 1,400-1,500 per quintal (100kg), up 17-25% from Rs 1,200 a year ago on low availability, traders and a food company executive said. The current year’s minimum support price is at Rs 1,285.

“I don’t know if it is because of speculation, but on the ground, we are seeing scarcity of stocks,” said Chitranjan Dar, divisional chief executive at ITC Foods. “Wheat flour prices have gone up in the last couple of weeks.”

Other than speculation by traders in the hope of selling in the foreign markets as the US faces a drought this year, bottlenecks in supplies from the Food Corporation of India, holding the maximum amount of wheat at nearly 50 mt, are also responsible for the rise in wheat prices, said R.K. Garg, president of the Roller Flour Millers’ Federation of India.

The food security meeting on Wednesday decided to “be liberal” on legislation on food security to provide subsidized foodgrain to the poorest of poor. The revised Bill suggests that it should cover 70% of the poor in the country without categorizing them into general and priority categories. The meeting also asked Rangarajan to review the food procurement policy in order to reduce subsidies.

Liz Mathew in New Delhi, Makarand Gadgil in Mumbai and PTI contributed to this story.

ruchira.s@livemint.com