Economics for everyone- The Monsoon Magic Prof.M.

Guruprasad / 02:01 PM , Nov 27, 2009

It is not surprising to see on a day today basis the media has been cautioning on the deficit of monsoon and its impact on the Economy. Recentlyi n downgrading its official forecast for the South-West monsoon to belownormal the India Meteorological Department (IMD) has only confirmed this.Weak monsoon between July and August this year has emerged as a major macroeconomic risk for both growth and inflation.In its latest report Deficient Rainfall Impact Parameter (DRIP), Crisil said the 64 per cent shortfall in rain during July 30-August 5 raised the cumulative deficiency in this monsoon season to 25%. According to the media sources, India a traditional rice exporter, willimport the grain for the first time in 20 years to meet a projected shortfallof the crop this year. Let us understand the impact of monsoon on economy. Once there was a discussion between an economist and an Ecologist. While discussing about the delayed monsoon the ecologist expressed concerned about its impact on overall ecology. The economist agreed with him and replied him dear if there is a failure in monsoon not only your profession but even my profession is at stake. Importance and the Impact: Impact on the Economy Even though the share of agriculture is declining in GDP; the income dependence is still high. Today agriculture accounts for 25% of GDP.However the income dependence on agriculture remains high, given that more than 60% of theIndian rural working population still directly or indirectly earns its livelihood from agriculture or related activities. Agricultural growth therefore in turn determines demand growth in other industry segments The monsoon is crucial to Indias economic growth as agriculture contributes 25% to the GDP. With only a part of the agricultural land in the country irrigated, and the rest of the cultivable area depends heavily on monsoons. GDP growth decelerates to below 5% levels inyears of decline in agriculture, while good agricultural years have enabled more than 6% growth in GDP in the past The link between Monsoon Crops and Business Over 600mn Indians directly orindirectly depend on agriculture for their livelihood. With low level ofirrigation, monsoons directly impact agriculture.Strong agricultural growthdrives rural demand in industries such as consumer goods, automobiles andfertilizers. A good monsoon duringthis time will result in a good agricultural growth which would translate intorising rural incomes, which in turn would trigger a revival in demand inseveral other industries. The demand revival is immediate in certain industriessuch as fertilizers, agrochemicals or tractors. Demand growth is witnessed witha time lag in several other industries such as FMCG, durables and automobiles(particularly Motorcycles). In a good monsoon year, a huge pickup in ruraldemand for consumer durables and vehicles is witnessed specially during the festivaland marriage season (OctoberDecember). For several FMCG companies, ruralsales account for 40-50% of their turnover, and a good agricultural growth isthe right recipe for an improvement in topline growth.

Let us unerstand somekey dimensions of monsoon which affect the agriculture sector and the business andthe people at large. The main factors are The southwest monsoons in India Kharif and Rabi Supply shocks Drought The southwest monsoons in India In India,the four months June - September form the core of the rainy season all over thecountry. Between 75-90% of the

total rainfall is concentrated over this period.The southwest monsoon enters the mainland over Kerala in the first week ofJune. It moves northward to cover the whole of India by mid-July. It startswithdrawing from mid- September. The southwest monsoon is critical to thedevelopment of Indian agricultural production.

Seasonal variation of rainfall and differing pattern acrossvarious regions is the most distinguishing feature of Indian monsoons. Theyear-to-year variability in the monsoon rainfall occasionally leads to extremesituations of droughts and floods affecting the agricultural output and thenational economy. Kharif andRabi These two terms arethe building blocks of an understanding of Indian agriculture. These are namesgiven to the two main cropping seasons across the country, falling in twodistinct parts of the year. Kharif is the name given to the monsoonirrigatedcrop, falling roughly between May and September. Sowing for the kharif cropbegins before the onset of premonsoon showers, and is ready to harvest afterthe monsoon cycle is over. The main kharif crop is paddy (rice), since it isthe most water-intensive food crop, needing many inches of standing in theseedling stage. 55 per cent of kharif cropped area and 75 per cent of kharifoutput is taken up be rice. Though wheat is also grown in this period, it ismore a dry season crop owing to its relative economy with water. The Rabi reason begins with the onset of winter in the northern plains. Oncethe kharif crop has been harvested, the soil retains sufficient moisture fromthe monsoon to support another crop like wheat. Although it has to besupplemented with irrigation and the waters of the retreating monsoon, the Rabicrop is generally more resilient to water stress than the kharif crop.

Monsoon and its linkwith Kharif Crop The southwest monsoonprovides 80% of Indiastotal precipitation and is critical to the development of its major food andcommercial crops such as rice, coarse grains, pulses, peanuts, soyabeans andcotton. Planting of the largely rainfed Kharif (monsoon season) crops, whichinclude rice, corn, millet, peanut, soybean and cotton begins after the monsoonfirmly establishes itself over the major producing states and plantingcontinues through July and early August.Farmers in the northern rice surplusstates of Punjab and Haryana, where irrigation is available, often completerice transplanting prior to the monsoon arrival. Suppose if it is the other way (bad monsoon) then we have thefollowing impacts Supply shocks Drought Supply shocks In the Indian context,the erratic behaviour of monsoon often creates supply shock of agriculturalcommodities. When there is a sharp decline in the supply of a commodity bycertain sudden development or some erratic factor (outside the normal businesscycle or cyclical trend phenomenon) such decline in supply is called as asupply shock. The difference between a supply shock and a normal decline insupply needs to be understood well. Drought Prolonged drought results in the depletion of surfacewater and a fall in groundwater levels, causing severe shortage of water forlivestock and human needs. An agricultural drought is defined as a period offour consecutive weeks (of severe meteorological drought) with a rainfalldeficiency of more than 50% of the LTA (long-term average) or with a weekly rainfall of 5 cm or less during theseason. During this time the relief measures are undertaken by both theState and the Central government. The steps taken may include: Suspension ofrevenue collection from that region, waiver of interest on loans, deferredrepayment of loans, food for work programmes, direct cash relief, andassistance for crop damage, damage to livestock etc. Impact Analysis: According to experts, the impact of the delayed and deficitmonsoon on the corporate sector, consumers and the Public at large will be

Expensive Food: Since the July and August rainfall is the most criticaldeterminant of agricultural production and with many parts of the countrywitnessed deficient to scanty rainfall; it will be a challenging period.Studies show that Uttar Pradesh, Madhya Pradesh, Maharashtra, Andhra Pradesh,Bihar and West Bengal have been hit the most by poor rainfall.These six Statesaccount for 47 per cent of total kharif foodgrain production and 46 per cent oftotal kharif rice output.Punjab and Haryana too have suffered from rainfalldeficiency but has irrigation buffer.The crop loss may not be significant butcost of irrigation may go up and will definitely result in increased inputsubsidy. Thus food inflation which is already pressurised will face furtherpressure due to poor rainfall. Rice will remain the most adversely impactedcrop due to high water requirement. The poor rainfall will lead to a sharpreduction in the area under rice cultivation. Other vulnerable crops are coarsecereals and pulses. A surge in food prices unexpectedly pushe d the annual change in Indiaswholesale price index into positive for the first time since late May, puttingpressure on the central bank to bring forward an exit from its easy monetarypolicy. The annualised wholesale price index rose by an unexpected0.12 percent in the year. The food articles sub-index rose an annual 15.4 percent, up fromthe previous weeks 14.8 percent rise, as a dry spell hit nearly half of Indiasdistricts, hurtin g summer crops and prompting the government to take steps toraise supplies. Impact on Sales:Whether it is bikes, toothpaste, clothes or mosquito mats, whatever is theproduct rural India providesa sizeable contribution to the demand of products (e.x. 57% share of Indias totalFMCG market). So if incomes go down in this market, it is going to hit therural business. Costly loan: Since Banks are able to give cheap loans onlywhen they are themselves able to get cash at lower cost. This cash comes mainlyfrom savings that we make in our bank deposits. With the rural and small towneconomy accounts for substantial portion of Indias income the impact will bemore. So, when a large part of rural India reels under a drought and notable to plant cash crops, it directly affects income there. This, in turn, willreduce household savings, and cash flow into banks for lending to the consumers Tax:A poor monsoon means that large sections of the population will be in seriousneed of relief measures. Whether it is farm loan waivers, subsidy on food,agri-inputs, road-building projects or employment guarantee schemes, everythingcosts money. And this money has to come only from the government exchequerwhich has to come from our tax payments. Thus tax breaks may not happen.

Exports: Exports will be afected. Thegovernment may not permit exports. Exports of food items may also face problembecause poor rains will reduce supply and raise the local as weel as global pricesand make the products uncompetitive. Added with this the current meltdown (readrecession) scenario across the world it will hamper the business. Conclusion: The economy presently seems to be in a recovery path. Recently ourAgriculture Minister has said that late end-season rainswill help Indiaswinter crops. The late rains are very helpful particularly for Punjab, Haryana, Orissa and Chhattisgarh. According tohim there would not be any pressure on food grains supply, as the stockposition is good. There is a need for serious policy planning to meet andmanage the requirement in the face of frequent deficient monsoon. Expertssuggest demand-side management strategy is needed for rationalising water usepatterns and address the problem of monsoon dependency. While dependence cannotbe eliminated, it may be possible that appropriate interventions in variousspheres can address the negative impact.The monsoon rainfall is the major source of irrigation (70%water for agriculture, 22% for industry and 8% for urban areas), yet its majorportion is being wasted due to lack of water holding capacity in thetraditional rain water harvesting structures. According to experts, carefully designed investment strategyon low-cost but effective watershed management, restoration and management ofnatural water bodies with the help of peoples participation would go a longway in mitigating the impact of monsoon. Experts also state that the solutionto minimising the dependence on the monsoon lies in an effective monsoon-governance strategy such as proven forewarning systems and rainfallforecasting, institutional setup to ensure timely and assured input-outputdelivery system including seed system, rural credit and crop insurance. Thereshould be an enabling environment and capacity to develop and adoptwater-saving mechanisms such as drip irrigation, fertigation and other moistureconserving practices. According to some economists since the small farmers areunable to invest in irrigation infrastructure, the government should play a bigrole in fulfilling the social responsibility. Increasing agriculturalgrowth is critical not only for Indiato sustain high growth rates, but also to move millions out of poverty.

Prof.M.Guruprasad AICAR BUSINESS SCHOOL