The monsoon is crucial for 60% of the farms in India and the approximately two thirds of the nation's population that depend upon agriculture for their livelihood. Considering the direct correlation between disposable income and ample rainfall, a delayed or below normal monsoon, messes with a lot more than just industry. It affects the economy as a whole.
The monsoons this time are expected to be below normal for the second time in three years. The government has just announced that the June-September rainfall will be at 95% of the long period average. For a nation already reeling under high food prices, this could potentially lower farm output and accelerate inflation even further.
Yes Bank's chief economist, Shubhada Rao, and chairman of the commission for agricultural costs and prices, Ashok Gulati, join CNBC-TV18 to discuss the effect of the below-normal, but well distributed rainfall on our economy.
Below is the verbatim transcript. Also watch the accompanying video.
Q: We have just heard from the MET department that it’s going to be about 95% of the long-period average, particularly for July. They are forecasting a weaker monsoon especially in the first half. How concerned are you given where inflation is today?
Rao: Quite clearly, not a very positive news for inflation forecasters because after almost 2 years of double digit inflation in food articles, this does not come exactly as fair news. Having said that, one does conquer that the temporal and special distribution will also have some effect on the overall impact of monsoon on agriculture output. Also, last year, we have seen a record food grain output. So to that extent, maybe the pressure may not be as aggravated as one would have thought. However, when we are already groping with pressures of supply-demand mismatches on food, particularly protein food, this does pose some concerns for food inflation to revert back to a single digit in the coming months.
Q: We also heard the met department saying that the rains will be well distributed and they will not hurt crops. At this point, do you share the concerns that we are perhaps headed for a higher food inflation scenario?
Gulati: I would say that at present, there is no need to press panic button. There is need to be cautious and continuously monitor the situation, but I don’t think it is so grim a situation that we start ringing the alarm bells. Why I am saying this is because you have more than ample food grain stocks in the government kitty and we have been struggling to really store it well. So it will be a good opportunity to unload quite a bit of that in order to control inflation. Another point I would like to put forth is that it should be a wake up call for planners in the policy making circle who are thinking of a very big national food security bill. Even in a bumper year of 2010-11, maximum that we could procure was about 57 million tonne of food grains. If they are going to bring a bill which entails about 70 million or 80 million tonne of commitment, then, that may not be a feasible proposition. So anything beyond 50 million tonne is not an advisable proposition for the national food security bill.
Also read: 2011 monsoon rains seen just below normal
Q: Do you think the government will now have to once again look at its policy in terms of exports as far as food items are concerned. We had resorted to export bans in 2009, so there is some relief on that front. But do you think the government will have to now go back and review those decisions?
Gulati: The government had imposed a ban on export of wheat and rice in 2007-08. However, today wheat cannot be exported because world market prices are coming down except from Gujarat. Punjab wheat, Haryana wheat cannot be exported. As far as rice is concerned, you are exporting basmati to the tune of about 2.2-2.5 million tonne. Only common rice could have been exported another 3-4 million tonne and this would have given a lift to the market, but that will perhaps remain closed.
Q: News flow at this point of time seems to be impacting the way that the markets are moving. How do you see the market reacting to this?
Rao: I don't think the market would over react as far as this monsoon news is concerned because quite clearly there are much bigger adverse news flows. This is not going to have such a lasting impact as far as market sentiment is concerned. But this also gives an opportunity for government to step up in supply and distribution efficiencies as far as food is concerned-from food warehouses to the markets. And I think if that happens then we need not set a panic button but clearly it would underpin the negative sentiments for sure.
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