At a press conference after the announcement of his first quarter review of monetary policy, Reserve Bank of India (RBI) governor D. Subbarao said all of us are “chasing the monsoon". That’s the title of a book by Alexander Frater, who wrote about his journey through India during the monsoon months. Subbarao used the title as a metaphor for the country’s dependence on the monsoon. Analysts now track every ebb and flow of the warming of sea temperatures in the Pacific that goes by the name of El Nino, even following La Nina when El Nino doesn’t seem to be doing anything. The monsoon forecasts by the India Meteorological Department are sliced, diced and analysed by a growing tribe of monsoon watchers.

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And why not? After all, aren’t we suffering the after-effects of last year’s failed monsoon with farm production down in the dumps and food prices spiralling out of control? As the RBI governor put it so lucidly: “If it rains, everything is well on earth and cordial in heaven. You carry on with your work. But if it doesn’t, all you did was drought relief. Now at the end of my career I realize I am once again hostage to monsoon." In these circumstances, tracking the monsoon should be our No.1 priority.

Those of us with sufficiently long memories will remember the terrible drought of 1979-80, when the monsoon rains were deficient by 19%, gross domestic product (GDP) fell by 5.2% and prices rocketed. But we don’t really have to look that far back to gauge the effect a failed monsoon has on agricultural production. Consider the painful drought of 2002-03, when the departure from normal rainfall was around 20% and agricultural production went down by 7.2%., pulling GDP growth down to a mere 3.8%.

Last year, as the bad news on the monsoons became clear, economists became increasingly bearish on growth. In a review of the economy carried out in October last year, the economic advisory council to the Prime Minister warned that growth in agriculture would be -2% in 2009-10. In April this year, it revised that up to -0.2%, which was still negative but nevertheless quite remarkable because the deficiency in rainfall was as high as 23%. That estimate of agricultural growth, too, has now been revised up to 0.2%. The link between a bad monsoon and agricultural production is no longer so strong.

What about prices? In October last year, even when the shortfall in rains was known, RBI kept its forecast of wholesale price inflation at end-March 2010 at 6.5% with an “upside bias" in its second quarter policy statement. Was the central bank trying to play down inflationary pressures? It mentioned two factors that could mitigate the effect of the deficient monsoon: the fact that the share of agriculture in GDP has been progressively declining and the large stock of foodgrains with public agencies. It was only in January this year that RBI raised its estimate for March-end inflation to 8.5%. It finally came in at 11%.

The numbers throw up several points. One is that the relation between deficient rains and agricultural production has come down over the years because of better irrigation. The second is that the relation between a drought year and overall GDP growth too has weakened because agriculture is no longer that important to the overall economy. And third, it doesn’t necessarily follow that a bad monsoon will lead to high food prices.

Consider, for instance, what happened in 2002-03. During that year, with a rainfall deficiency of 19%, agricultural production fell 7.2%, but the average wholesale price increase for the year was 3.4%. At end-March 2003, the year-on-year rise in the Wholesale Price Index (WPI) was 6% with the index for primary articles up 6.3%. Perhaps, that is the reason why RBI pegged its 2009-10 inflation rate at 6.5% last October.

A note dated 27 May this year by Credit Suisse Group points out: “7% is the correlation between WPI Food (fiscal year-end) and rainfall quantity in the numbers we have from 1984.... Statistics show that inflation in India is rarely caused primarily by lack of rains. In other words, in a year of high grain inventory, food inflation was perhaps not caused by monsoon shortfall in 2009..."

So, why did food prices go up so much this time? One reason is gross mismanagement by the government—stories of rotting foodgrains while prices soar are well known. Another is the continuously rising food procurement prices, which have gone up around 50% in the last three years, according to a Deutsche Bank AG analysis. And the third is a structural change in the rural economy. With rising income, demand for food has gone up, aided by the new social safety net schemes, such as the rural employment guarantee programme. As the PM’s advisory council has said, “It would be hard to explain the high inflation rates since September–October 2008, well before the weak monsoon of 2009, and in a year that had record foodgrain output on the grounds of shortfall in output." That is why it has called for raising farm productivity.

Frater’s monsoon travels in India happened more than two decades ago. Much has changed since then.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at