A big part of India’s strategy to combat inflation this year hinges on expectations of a bumper harvest of its autumn crop, which depends mostly on rain.
Predicting it is, therefore, very tricky.
The cumulative rainfall during the first half of this year’s monsoon season, which runs 1 June through 30 September, has been 2% less than the average between 1941 and 1990, according to the meteorological department in New Delhi.
More importantly, the distribution of rainfall has been highly uneven this year, with north-west India currently running a 27% surplus and southern India looking vulnerable with a 20% deficiency.
This may prove to be a false alarm: The emergence of a low-pressure weather system over the Bay of Bengal has, of late, caused heavy precipitation in southern India, ending a dry spell that was beginning to look dangerous to agricultural production.
According to Morgan Stanley economists Chetan Ahya and Tanvee Gupta, about a quarter of the country’s total cultivated area has so far received below-normal rainfall. That’s an improvement from 35% a week earlier.
Encouraged by an increase in rainfall, farmers have recently pushed more of their lands towards growing rice.
Even then, the news isn’t all good. One concern is that for some other key crops, the farmers’ response continues to be muted.
Sugar rose to a two-week high in New York last week, partly on doubts about the size of the Indian sugar cane crop.
Dry weather is also a risk for peas, beans and lentils, which are an important source of protein in the vegetarian Indian diet. The group accounts for 0.6% of the main inflation index, while sugar has a 3.6% weight in the gauge.
The annual inflation rate in India in the week ended 19 July was a little less than 12%, the quickest in 13 years.
The Indian central bank, which raised interest rates last week for the third time in two months, may have to inflict more pain on borrowers if global crude oil prices, which haven’t been allowed to fully pass through into the local economy, surge again. Or if food becomes more expensive.
Purists would argue that monetary policy shouldn’t respond to inadequate rainfall, a supply shock. That argument doesn’t hold in India where food makes up a large chunk of the average person’s consumption basket.
The Reserve Bank of India’s monetary policy statement last week made six references to monsoon rains, compared with just one for the troubled US subprime mortgage market. That is an indication of the importance policymakers attach to seasonal rainfall, hardly surprising in a country where little of the arable farmland has access to man-made irrigation facilities.
Small is beautiful
The problem with India’s irrigation strategy is its undue obsession with large dams and canals.
“After 200 years of canal building, less than 15% of Indian farmlands benefit from canal irrigation,” says Tushaar Shah, a principal scientist at the International Water Management Institute in Battaramulla, Sri Lanka.
India can lessen the risk to the economy from monsoon failures by thinking small. A simple but effective strategy will be to provide incentives to farmers to recharge their wells, which they have traditionally used to pull water out of the ground, though not to put moisture back into the aquifer. Recharging wells isn’t an idea that appeals to Western scientists, Shah says. But, unlike in Australia and the US, India doesn’t have large, uninhabited areas to use as recharge basins. At the same time, Indian farmers own 20 million wells, of which 11 million are in rocky, peninsular India.
“Using around 1,000 cu.m per ha of water from wells just-in-time to water a wilting crop just once can raise yields by 30-230% over rain-fed area levels,” Shah wrote in the July issue of Pragati, an online magazine.
Making each well recharge-ready — by putting in place filters that desilt rainwater — would also cost a fraction of the huge investment needed to support canal irrigation.
Without an improvement in yields, agriculture in India will become more unprofitable, even as the nation’s large and increasingly affluent population demands more and better food.
In the absence of a credible, long-term strategy to boost agricultural production, the Indian government has resorted to draconian measures to tackle inflation. Locally traded futures contracts have been banned in rice, wheat, potatoes and chickpeas. At the same time, the government has allowed imports of many key commodities at zero or reduced tariffs to satisfy local demand.
None of this impels the domestic farmer to boost production.
The vagaries of the monsoon are more important for price levels than they are for aggregate demand. The share of farming in India’s gross domestic product in the last fiscal year was less than 18%, compared with 28% in 1998.
Had policymakers shown more ingenuity and promoted the optimal use of monsoon rains, they would have helped remove a key source of volatility in annual farm output. And analysts won’t be looking heavenwards to predict inflation and interest rates.
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